O'GILVIE v. UNITED STATES
After her death from toxic shock syndrome, Betty O'Gilvie's husband and two children received a jury award of $1,525,000 actual damages and $10 million punitive damages in a tort suit based on Kansas law against the maker of the product that caused Betty's death. The O'Gilvie's paid income tax on the portion of the award that represented punitive damages, but then sought a refund. Subsequently, Betty O'Gilvie's husband sued the Government for a refund and the Government sued the O'Gilvie children to recover the refund it had made earlier. In finding for the O'Gilvies, the District Court found that 26 USC section 104(a)(2), as read in 1988, excluded from gross income the "amount of any damages received... on account of personal injuries or sickness." The Court of Appeals reversed.
Does the exclusionary provision of 26 USC section 104(a)(2), which excludes from gross income the "amount of any damages received... on account of personal injuries or sickness," apply to punitive damages received by a plaintiff in a tort suit for personal injuries?
Legal provision: Internal Revenue Code
No. In a 6-3 opinion delivered by Justice Stephen G. Breyer, the Court held that the punitive damages received by the O'Gilvies were not received "on account of" personal injuries," and therefore the provision did not apply and the damages were taxable. Agreeing with the Government's definition, Justice Breyer reasoned that the exclusionary provision applied to those personal injury lawsuit damages that were awarded by reason of, or because of, the personal injuries, and not to punitive damages that do not compensate injury, but are private fines to punish and deter reprehensible conduct. Justice Antonin Scalia, who was joined by Justices Sandra Day O'Connor and Clarence Thomas, dissented.
Argument of Stephen R. McAllister
Chief Justice Rehnquist: We'll hear argument now in Number 95-966, Kevin O'Gilvie and Stephanie O'Gilvie, Minors v. United States, and 95-977, Kelly O'Gilvie v. The United States.
Mr. McAllister: Mr. Chief Justice and may it please the Court:
The minor children of the decedent in the wrongful death suit underlying this case have raised before this Court two independent and potentially dispositive legal issues.
The first is whether the punitive damages that the children received in connection with the death of their mother are excludable from gross income as any damages received on account of personal injuries.
The statute on its face does not contemplate a distinction between punitive and compensatory damages.
The statute says any damages, a word that the United States frequently does not include in its quotations of the statute in its brief in this Court.
Certainly, there was a longstanding... has been a longstanding understanding in tort law that there is a difference between punitive and compensatory damages, and this Court has often stated that Congress is presumed to have known the state of the common law when it enacts statutes.
Congress easily could have said only compensatory damages received on account of personal injuries should be excluded, but it did not do so.
It said, any damages received on account of personal injuries should be excluded.
In fact, when Congress has wanted to draw a distinction between punitive and compensatory damages it has expressly done so, for example, in the Federal Tort Claims Act, in which Congress precluded liability of the United States for punitive damages arising from the tortious conduct of its employees and, indeed, the IRS itself has at times read this statute in precisely the way we contend it should be read, to exclude any and all damages that are recovered in connection with a personal injury suit.
Unknown Speaker: Well, of course, you've now used the term, in connection with, but the statute says on account of, and it's my impression the Government's position is that punitive damages are not on account of the personal injuries.
Mr. McAllister: That is certainly the Government's contention, Your Honor, and we believe that's wrong for several reasons.
First of all, if you look back to the language of the statute as originally enacted in 1918, the substance of it has not changed, but the organization and the order has changed to some extent.
The original provision in 1918 basically excluded accident or health insurance benefits or Worker's Comp benefits which the sentence then said, received as compensation for personal injuries, plus any damages received on account of personal injuries whether by suit or agreement, so that the statute itself, when you look at how it was originally enacted, it was a very odd way that Congress intended all of those things to be limited to compensation, to list certain things followed by the phrase, received as compensation for personal injuries, and then to go on and say, plus any damages received on account of personal injuries.
Furthermore, when this Court talked about the on account of language in its decision in Schleier recently the Court talked about whether the damages were attributable to an underlying personal injury, or whether the underlying personal injury affected the amount.
The Court concluded that liquidated damages under the Age Discrimination and Employment Act did not satisfy either of those conditions, but punitive damages are different.
Punitive damages do satisfy those conditions in a couple of ways.
First of all, as this Court recognized recently in BMW v. Gore, punitive damages both the availability and the appropriate amount in most jurisdictions depends on considerations of the underlying harm, the nature of the harm, the extent of the harm.
Gore recognizes as much when it talks about the first factor, for example, the reprehensibility of the conduct, talks about personal injury is more egregious than property damage, a physical injury in essence is more serious than perhaps a dignitary injury, and most jurisdictions, if not all, recognize those concepts as far as punitive damages are concerned in determining whether they're appropriate and then what amount is necessary.
Furthermore, it's the rule in virtually all jurisdictions, again, if not all, and the traditional rule is that there can be no award of punitive damages in the absence of proof of actual harm and generally in the absence of proof of actual damages, that there needs to be an actual compensatory award made before punitive damages are allowed at all, and for those reasons, even within the attributable-to language and the affecting the amount language that this Court endorsed in Schleier, the punitive damages in this case satisfy that test in a way that the liquidated damages under the Age Discrimination in Employment Act did not.
Furthermore, punitive damages, as we've suggested, do sometimes serve compensatory purposes, so even if the Court is to view it in that fashion, historically that was clearly the case.
We've cited the Black's Law Dictionary from the time period when this statute was enacted, which clearly contemplates that in some situations they serve a compensatory purpose.
But even more recently, in the 1996 amendment to this statute Congress recognized that sometimes what the States call punitive damages may, in fact, serve compensatory purposes, and that recognition is in the new section 104(c), in which Congress has said in the new 104(a)(2) punitive damages are no longer excluded, except, it says in subsection (c), in a wrongful death suit where only punitive damages are allowed, and the jurisdiction of which I'm aware is Alabama.
There may be a couple of others.
Congress has said in that circumstance those punitive damages are excluded, apparently because--
Unknown Speaker: Where is that set forth?
I wish there were some place where the whole text of the current code is set forth, including that amendment, and there was an '89 amendment?
Mr. McAllister: --There's an '89 amendment, Your Honor, which altered the scope of the original.
The 1996 amendment does not appear in any of the original briefs because it was passed by Congress in August and signed by the President in August, after the briefing had been completed.
Part of the text is included in the supplemental briefs.
I don't know if 104(c) is actually included in the supplemental briefs, but that text was all extremely recent and after the merits briefing was basically completed in this case.
The 1989 amendment is discussed in the briefs.
Unknown Speaker: --Well, of course, you know, when I read the United States Code I don't do it piece by piece and figure out which paragraph was enacted in 1918 and which was enacted in 1989, or 1996.
I read it as a whole, and it seems to me one has to decide whether punitive damages are covered or not on the basis of the whole text as it now appears.
Mr. McAllister: Well, I think that's correct.
Unknown Speaker: I'd like to see the whole thing set forth somewhere.
Mr. McAllister, as far as the most recent amendment is concerned the effective date is from the time of that enactment, so that is not law for purposes of this case.
Mr. McAllister: It's certainly not, Your Honor, in terms of resolving the statutory interpretation issue present here.
All I'm trying to suggest is that in the 1996 amendment Congress itself is recognizing that sometimes punitive damages may serve compensatory purposes.
The example it recognized is the Alabama situation, where in a wrongful death suit all the plaintiff is allowed to recover, the only thing is punitive damages and Congress said, even though those are labeled punitive damages by the State of Alabama, we want them to be excludable under section 104.
Unknown Speaker: And what about the '89 amendment?
Was that also only prospective?
Mr. McAllister: The '89 amendment was prospective, but it's important, because what the '89 amendment does, it can be read two ways, but what the lower courts have strongly endorsed is the view that what Congress understood at the time was that all punitive damages as of 1989 were excludable under section 104.
There was a debate between the House and the Senate as to how they might narrow the scope of that.
What they ultimately ended up with was a provision that says the exclusion shall not apply in any case not involving physical injury or physical sickness, and that narrowed the scope, but it remained the case that punitive damages received in a physical injury case are excludable and in fact the House--
Unknown Speaker: Mr. McAllister, I don't understand your reference to lower courts.
I thought that this pre-19... for pre-1989 and post 1989 to 1996 that all circuits said that these awards, punitive damages awards, whether on account of personal injury or on account of something else, are taxable.
Isn't that the law in all the circuits except the Sixth Circuit?
Mr. McAllister: --I don't believe that's correct, and certainly most of the cases come after the 1989 amendment, and what I'm suggesting is that the lower courts have, when they've decided these cases, looked at that amendment and said, what--
Unknown Speaker: What circuit, other than the Sixth Circuit, has ruled in favor of taxpayers on these challenges?
Mr. McAllister: --You're right in that no circuit other than the Sixth Circuit has ruled in favor of taxpayers.
The tax court itself had at times ruled in favor of the taxpayers.
Unknown Speaker: But the tax court is subject... has the Skolson rule, so--
Mr. McAllister: Was reversed by circuits on further review.
Unknown Speaker: --Yes.
Mr. McAllister: That's correct.
The point I'm trying to make is that the 1989 amendment shows that Congress understood the law to be, and that is certainly not determinative or conclusive in our view, but that may well be, or should be accorded some weight and some consideration here in that what Congress understood the statute to do is exactly... in 1989 is exactly what we are contending it does, and most of the lower courts that have looked at it have said that it certainly appears that Congress understood the statute to exclude all punitive damages up to the point at which it amended it in 1989.
Unknown Speaker: Is... in line with your view, if you're correct that these awards are not taxable, then juries should have been charged, should they not, that whatever you award in punitive damages will not be subject to tax?
Mr. McAllister: They could have been charged that, Your Honor, and certainly, if punitive damages are subject to taxation, they probably should also be instructed that that is the case, so that the damages that they are awarding will be taxed and the plaintiff will actually receive less than the full amount that the jury is assessing.
Unknown Speaker: That would be a matter of State law.
Mr. McAllister: That would be generally a matter of State law, where you're talking about State tort actions, how the jury is instructed in terms of those tax consequences, that's correct.
The United States... and to go back to Justice Scalia's point about interpreting the statute as a whole, the United States suggests that the title that goes with the statute, compensation for injuries or sickness, suggests a more limited or narrower scope.
The problem with that argument is that title was not present in 1918, and there's no suggestion that there was any debate by Congress when that title was added as part of apparently the codification process that they were in any sense altering or changing the original scope of the statute.
The operative language has remained the same from 1918 onward.
What has happened, though, is the tax laws were codified in what was originally one sentence, drawing the distinction between accident or health insurance benefits and Worker's Comp benefits on the one hand received as compensation and any damages received on account of personal injuries.
That distinction has been somewhat obscured by the breaking down of it into three... what is now three separate provisions in the tax code, (a)(1), (a)(2), and (a)(3).
Unknown Speaker: Well, it goes on to (a)(5) at this point, doesn't it?
Mr. McAllister: It does go on to (a)(5), Your Honor.
Unknown Speaker: What do you make of the textual argument, or the textual distinction?
I'm looking at page 22 of the Government's brief, which quotes some of the other subsections.
(a)(1) provides an exclusion for certain sums as compensation for personal injuries or sickness.
The (3) refers, again, to certain sums received for personal injuries and sickness.
(4) again uses the for language, and that suggests that the specific dollar amounts that they're referring to are those which are attributable to the sickness or the injury, as distinct from something else.
Your subsection (2) uses the phrase, on account of, which would suggest, by contrast, a broader meaning.
Which... we seem to have a choice, I guess, of statutory interpretation rules.
We could either say, well, the distinction presumably is intended to enact a difference, or we could say, well, on account of is not entirely clear and we ought to use the criterion of noscitur a sociis.
If we want to know what this one means, which is not clear, look to what it's companion provisions mean which are clear.
Which of those two criteria should we adopt in assessing the contrast in the language?
Mr. McAllister: Well, Your Honor, it's certainly our view that you should look primarily at the language of (a)(2) itself, which on its face suggests a broader interpretation... any damages received on account of.
It would have been extraordinarily easy for Congress to have said, as compensation, which it did with the rest of that statute when it first enacted it.
So that yes, the companions around that provision perhaps do suggest a narrower focus, but certainly in the original provision, and the substantive language itself has not changed, a broader construction is suggested.
And again, without going back through the history, when you simply look at these provisions today, that one sits in the middle of all these other what appear to be purely compensatory provisions, but our view is, you cannot fully understand that provision or give full effect to its language without looking back to the history of it and following through how it has come through the first codification, the recodification, and how it ended up where it is today.
Unknown Speaker: So you think the history has more significance than just the contrast in the language reading the statute, as Justice Scalia would, as a whole today?
Mr. McAllister: I think both are important in the sense that the history is certainly relevant, but to the extent that provision indicates a different scope than the others, this Court should give effect to that different scope, because--
Unknown Speaker: Mr. McAllister, what about the ground rule in interpreting this dense tax code?
Everything is income except, and exceptions are to be narrowly construed?
Mr. McAllister: --Your Honor, we recognize that that principle is there.
In our view, the way to deal with that is that the Court should look at the language itself, and look at the history, and we believe when you do that, that the language is no longer so ambiguous, so that it is not a choice of two interpretations competing, which we simply have no way to choose between one and the other.
In fact, the history strongly suggests that one interpretation is the correct interpretation, the broader interpretation, but I do recognize the existence of that default rule as it's been characterized at times.
But we're suggesting that when you look at all of the surrounding evidence here, the things that Justice Souter has talked about, the contrast in the language, the history of the provision, where it came from, and how it got to be where it is today, that really only one conclusion makes sense here, or at least is the stronger conclusion.
Unknown Speaker: There's no default, is your position.
Mr. McAllister: That's basically... there should not be a default in this instance, because there's not a situation where you simply cannot tell which is the better view based on what evidence is available to this Court, and in fact again, Congress in 1989 essentially declared its understanding, and we're not suggesting, as the United States tries to assert in its brief, that that 1989 amendment tells you anything about intent in 1918.
We're simply saying Congress demonstrated that it understood the statute, the language of it, the meaning in 1989, that all punitive damages received in a personal injury suit were excluded, and that's--
Unknown Speaker: But it's possible, isn't it, that Congress might in an excess of caution amend the statute, feeling perhaps the statute, the existing language gives the result we want, but we want to make absolutely sure?
Mr. McAllister: --That's certainly possible, Your Honor, and... but what the Tenth Circuit clearly found, and I think most courts that have looked at this, when they looked at the legislative history, the discussion, how this amendment came about, and also the House Ways & Means Committee report, it seems pretty strong, the inference that Congress thought all of these were excluded, and it wanted to limit that, and the question was how much, in exactly what fashion.
The 1989 amendment went part way, the 1996 amendment went the rest of the way with respect--
Unknown Speaker: It's hard to rely on the Tenth Circuit in support of your position when they came out that way.
Mr. McAllister: --They came out because they ultimately decided that the reasons, the justifications for the competing views here were essentially equal, and they resorted to what the Court called in that case the default rule.
Unknown Speaker: And if they were essentially equal, you wouldn't be quarreling with that, would you?
Mr. McAllister: But we do not believe they are essentially equal, Your Honor.
With the Court's permission, I would like to reserve the remainder of my time for rebuttal.
Unknown Speaker: Very well, Mr. McAllister.
Ms. King, we'll hear from you.
Argument of Linda D. King
Mr. King: Mr. Chief Justice, and may it please the Court:
In 1918, Congress created an exception to taxation for the traditional tort victim.
When asked to extend this same exception to the hybrid statutory victim this Court in Burke and Schleier determined that the exception was not to be extended.
The enactors in 1918 did not know about the hybrid statutory rights, statutory remedies for age and gender discrimination that would be created in Federal statute some 50 years later.
Those Congressmen in 1918 wrote the statute for what they understood and what is before the Court today, the common law tort claim.
This Court has never before been asked to apply this statute to common law tort claims.
Instead, the recent cases of Burke and Schleier have asked this Court to apply the exclusion to the hybrid Federal statute with legislated remedies.
Those remedies are based primarily on lost wages.
Because the original statute allows only the exclusion for tort or tort-like claims, and because the hybrid statutes provided for contract-like recoveries, this Court in Burke determined that there was no tort-like claim.
In Burke, the Court tested the type of claim by a review of the type of damages that could be awarded under the Federal statute to determine that the claim was not tort-like but instead more in the nature of a contract claim, a contract for wages.
In Schleier, the Court was once again asked to name the type of claim, and again resorted to the analysis of the type of damages to do that.
A claim is known by the type of damages it produces in these hybrid Federal statutes.
The matter that is before you today is not--
Unknown Speaker: Was Schleier a liquidated damages?
Mr. King: --It's my understanding that it was, Your Honor.
The matter that is before you today is not the hybrid statute in which you must determine the type of claim.
It's the wrongful death of Mrs. O'Gilvie, the classic and quintessential tort claim, and precisely the type of tort claim contemplated by the 1918 Congress when writing the statute.
Now, when the statute was divided in 1954 into the numerous clauses that you've already discussed, section 104(a)(2) was cut apart from its first clause, from its context, if you will, and the potential for reading this statute in two separate ways was created.
The entire sentence in section 104(a)(2) has two separate and distinct meanings that each seem plain.
This is a rare and unusual type of ambiguity, a patent structural ambiguity, one we seldom encounter in the English language.
Before Schleier, every court which had found the statute plain had found in favor of the taxpayer.
The test of ambiguity is whether reasonable persons disagree as to the meaning of the words.
It is apparent that section 104(a)(2), out of its context, out of its original context, is ambiguous.
One third of this Court was struggling with the issue of whether the Court... excuse me, the statute was ambiguous or not.
Seven Federal circuit court panels have found this statute to be ambiguous, including the Tenth Circuit in O'Gilvie here, after this Court's decision in Schleier.
If we may presume that justices and judges are reasonable persons, the test of ambiguity is surely met.
Unknown Speaker: But any time there's a dissenting opinion taking a different view of the statute, that's a sign that the statute is ambiguous?
Mr. King: Mr. Chief Justice, I would not go that far as to say that.
Unknown Speaker: But if three out of nine dissent, then it's ambiguous?
Mr. King: Again, Your Honor, I would not say that.
I am merely--
Unknown Speaker: How about four out of nine?
But your position is, it's not ambiguous.
Mr. King: --No, my position is that it is, ambiguous out of context of the original steps.
Unknown Speaker: But didn't all those circuits read it in context?
There were arguments presented to all of them.
Mr. King: Each of those circuits determined that it first was ambiguous, and then read it in a very tunnel vision fashion, only the language of the current statute, section 104(a)(2) as written.
The two distinct tests that have been found in the language are, what is the underlying claim, and the second test is what is the nature of the underlying damages.
Unknown Speaker: You're going to tell us why you win if it's ambiguous, aren't you?
Mr. King: Yes.
Unknown Speaker: Okay.
Mr. King: The very nature of a patent structural ambiguity is that it has two distinct, clear, and mutually exclusive meanings.
The courts have examined this statute in a tunnel vision manner, and looked either at one or the other of the interpretations.
The type of ambiguity that we have here is resolved only by context here the original statute.
Upon a finding of ambiguity, the courts are not relieved of the duty to examine reliable evidence to determine congressional intent to exclude.
The only question here that must be answered is which of the two tests did the original statute meet?
Proper construction and interpretation of an ambiguous statute has a mandatory hierarchy of evidence, and the relative weight of each element primarily is nondiscretionary.
The most reliable evidence that we have of the intent of the enacting Congress is in the words of the original statute itself... there is not a default rule... that upon a finding of facial ambiguity that there is a finding also in favor of the Government.
This Court has never applied a default rule either in Schleier or Burke.
The requirement is a diligent search of all reliable evidence for the clear intent to exclude, whether found in the words of the current statute, the words of the original statute, or other reliable evidence.
Unknown Speaker: Well, why would you want a clear intent to exclude?
I mean, because of the basic ground rule that everything is presumed to be income?
Mr. King: Yes, that is correct.
Unknown Speaker: But that works against you, doesn't it?
The main rule for income tax, as I think everyone agrees, is that unless there's an exemption it's taxable, and it has always been understood not simply in the context of 104, but throughout the code, that if there's an ambiguity in an exemption, it should be read in favor of the Government, not the taxpayer.
Mr. King: --My argument is that in the face of an ambiguity, that you need to look to the intent of Congress before you decide in favor of the Government, and if there is clear and reliable evidence... clear and reliable evidence... that there was an intent to exclude, that should control before a default rule.
Unknown Speaker: I thought the conclusion you were going to come to was, then there is no ambiguity.
Mr. King: I'm sorry.
Unknown Speaker: In which case, it seems to me your case would be a lot easier.
Mr. King: Well--
Unknown Speaker: Aren't you basically saying there's no ambiguity?
Mr. King: --Yes.
Taken as a whole, if this is a holistic endeavor and we look at the history of the words written by Congress, even after divided in 1954, then there is no ambiguity in the statute, but section 104(a)(2) read out of its context has shown an ambiguity that each court that's dealt with it has struggled with mightily.
Unknown Speaker: You say the words are ambiguous, but if you take the history together with the words, then there's no ambiguity.
Mr. King: I think the words taken out of context, a short phrase taken out of the context of its original statute are ambiguous without its context.
Unknown Speaker: --Well, we don't interpret things out of context.
--when we ask whether it's ambiguous, we mean whether it's ambiguous in context, right?
Isn't that what we mean?
Mr. King: The appellate courts that have looked at this have given no regard to the original statute.
Unknown Speaker: So you say they were wrong.
Mr. King: I say they were wrong.
Unknown Speaker: Because they were taking it out of context--
Mr. King: Yes.
Unknown Speaker: --right, and ambiguity out of context doesn't apply, right, doesn't count?
Mr. King: That's... out of context, it doesn't count.
It is plain if you take the entire statute read as a whole.
And finally, the original statute was plain on its face, in context.
The clear distinction between compensation for personal injury and the amount of any damages is the clear comparison in the original statute.
Congress did not intend an allocation--
Unknown Speaker: Thank you, Ms. King.
Mr. King: --Thank you.
Unknown Speaker: Mr. Jones, we'll hear from you.
Argument of Kent L. Jones
Mr. Jones: Mr. Chief Justice, and may it please the Court:
Two terms ago, in Commissioner v. Schleier, this Court held that an award of damages that is punitive in nature rather than compensatory does not constitute damages on account of personal injury within the meaning of section 104(a)(2).
That holding applies directly to this case, and is compelled by the text, structure, history, and purpose of this statute.
The text of the statute provides an exclusion from income only for damages awarded on account of the personal injury.
It does not, as petitioners contend, encompass simply any recovery obtained in an action in connection with a personal injury.
Indeed, that precise contention was rejected by this Court in Schleier.
In Schleier, the Court said that whether the underlying cause of action is on account of, or rather, whether the damages are received in connection with an underlying cause of action that is a tort-type action for personal injuries is not, in the words of the Court, the beginning and end of the analysis.
Instead, as the Court emphasized in Schleier, each element of the recovery must be on account of the personal injury for the statutory exclusion to apply.
Only damages that compensate for a loss and are attributable to it are on account of the injury within the meaning of the statute.
As this Court said 40 years ago in Commissioner v. Glenshaw Glass, damages for personal injury are by definition compensatory only, and do not include punitive and other ancillary recoveries.
This Court's decision in Schleier provides two applications of the statute in this context.
The Court in Schleier did not doubt that age discrimination effects personal injuries to the victims of the discrimination, but the Court pointed out that the two remedies provided by statute for that discrimination, back wages and liquidated damages for willful violations of the act, did not compensate for those personal injuries, were not attributable to those injuries.
They therefore were not on account of those injuries within the meaning of the statute.
The... in... sorry, I've obviously lost my train of thought.
Because the damages are not awarded on account of the injury, they're not within the scope of the statutory exclusion from income which, as this Court has said on many occasions, must be narrowly interpreted and applied.
Now, punitive damages in the decisions of this Court have never been held to be compensation, and they are not awarded on account of an injury.
Punitive damages, as this Court has often said, are a civil fine awarded to punish and to deter reprehensible conduct, they are not compensation for the injury itself, and I think it's important to point out that the Kansas cases on which petitioners now rely for the first time in their reply brief make exactly that same point.
In Brewer v. Homestead Production Company, at 200 Kansas, page 96, the Kansas supreme court states, and I quote,
"In this State exemplary damages are not regarded as compensatory in any degree. "
That is exactly the statement that the Court made in Molzof, that this Court made in Molzof and in Gertz.
Unknown Speaker: What if we... what if this came up from a State where the supreme court had said something else about... something more favorable to the petitioners about the nature of exemplary damages?
Mr. Jones: --Sometimes, if you will, writing it in academic fashion, courts look at the fact that these moneys go to the plaintiff and say, perhaps they serve a compensatory purpose in that respect.
The money goes there.
But no court to my knowledge has held that a jury may award punitive damages as additional compensation.
What courts instruct juries, and what juries do, is they award punitive damages as deterrence and comp... and punishment for particular types of egregious misbehavior.
The Kansas supreme court is a classic example of that, because the Kansas supreme court said, well, punitive damages are not compensatory in any degree, but a jury may consider the amount of actual damages in deciding what punitive damages are appropriate to accomplish the State's independent objectives of punishing and deterring the conduct.
As the Fifth Circuit said just last year in Estate of Moore v. Commissioner, which is not cited in our brief but which I've mentioned to petitioner's counsel... it's at 53 F. 3d at 716... what the Fifth Circuit said in Estate of Moore is that this fact does not make a punitive award a compensatory one.
It does not, as the court said in that case, change the fundamental truth that punitive damages are awarded only on account of and in proportion to the defendant's wrongful conduct.
Thus, that court and all but one of the courts of appeals have concluded that punitive damages being awarded on account of the reprehensible conduct and not as compensation to the injuries do not come within the statutory exclusion.
The one court that reached a different conclusion, the Horton case in the Sixth Circuit, relied solely on a rationale that this Court flatly rejected in Schleier.
What the Court said in Horton is that any recovery obtained in an action based upon a personal injury is exempt from tax for that reason alone.
In fact, in Horton the Court said, that is the beginning and end of the analysis.
In Schleier, although this Court didn't cite Horton, the Court referred to that same contention and said, that is not the beginning and end of the analysis.
Unknown Speaker: In Schleier we also said that whether one treats respondents attaining the age of 60, or his being laid off on account of his age, as the proximate cause of respondent's loss of income, neither the birthday nor the discharge can fairly be described as a personal injury or sickness.
I mean, isn't that one explanation of Schleier that doesn't apply here?
Mr. Jones: It is a... it is the... it is the explanation of why those damages aren't on account of the personal injury, but the Court said--
Unknown Speaker: There was no personal injury is what we were saying.
Mr. Jones: --No, I believe, Justice Scalia, that what the Court acknowledged in Schleier was that age discrimination, the but-for, but for age discrimination these recoveries would not have been obtained, but the Court pointed out that these recoveries were not on account of that personal injury that stems from the age discrimination.
The personal injury is not compensated by back wages and by liquidated or punitive damages under the ADEA.
Unknown Speaker: That sentence suggests to me that we thought that the gravamen of the complaint was not personal injury or sickness, and that's a totally different point from whether it was on account of or not.
Mr. Jones: Well, but that's the point.
The question in these cases is not what is the gravamen in the complaint.
The question is whether the recovery is on account of the personal injury.
Unknown Speaker: You're... but it has to be on account of personal injury or sickness, but you're laying Schleier before us as though what it proves is that there was no on account of there, which is what this case involves.
Mr. Jones: That there was not--
Unknown Speaker: But really what I think it proves is that there was no physical injury or sickness there.
Mr. Jones: --Actually, I... Justice Scalia, we... only by reference to the opinion can this question be answered, but my recollection of the opinion is that the Court acknowledged in Schleier that age discrimination effects personal injuries.
The Court also acknowledged in Schleier, twice in a footnote and once in the text, that if the compensation obtained under the act was on account of those injuries, it would be within the statutory exclusion, but what the Court quite clearly held was that an award that is punitive in nature rather than compensatory cannot be said to be on account of the injuries, which is what five of the circuits have concluded when the same issue has been presented in the context of this case.
The text of the statute in our view, and I believe in the Court's view in Schleier, compelled that conclusion.
The title and structure of the act reflect the same understanding.
The title of section 104 is, Compensation for Injuries and Sickness.
Each of the subsections of the statute relate solely to compensation for different types of injuries.
None of them provide an exemption from tax for any recovery that's not compensatory.
The history of the act is fairly clear on this.
Each... several of the courts of appeals have described in detail the fact that this statute is derived directly from the 1918 opinion of the Attorney General holding that recoveries for personal injuries are akin to a return of capital.
They merely make the taxpayer whole for a personal loss, and would not represent income as that term was then understood.
As this Court said 40 years after that in Glenshaw Glass, that underlying rationale supports exclusion of compensatory awards, but it does not support exclusion of punitive damages.
The text, the structure, the history, the purpose of the statute all support this conclusion.
It's also compelled at the--
Unknown Speaker: Mr. Jones, I think you're coming to your... before you leave, I'd like you to comment on the 1989 amendment.
Now, I understand that of course it doesn't govern this case, because it happened later, but let's assume that if that had been in the statute from the beginning, would you not think that the better reading of the statute would have been that punitive damages were excludable?
Mr. Jones: --That's a difficult hypothetical, but if it had been in the statute from the beginning with the history that it had, my answer would be that it does not affect the outcome in this case.
I mean, we briefed rather clearly, I thought, on this subject.
The 1989 amendment quite clearly was designed to answer the question it addresses, and was quite clearly designed not to answer any other question.
That is to say--
Unknown Speaker: But is it not a fair reading of it, as your opponent argues, to suggest that the Congress that enacted that amendment must have assumed that punitive... this sort of punitive damages were excludable?
Mr. Jones: --It is neither factually nor legally a fair reading of the statute.
It's not factually a fair reading because the legislative history shows that Congress carefully crafted this provision to avoid taking a position on whether punitive damages were excluded for physical injury cases.
They wanted to solve this question about punitive damages in nonphysical injury cases.
They had an agreement, they had a majority to accomplish that.
They did not have a majority, or an agreement to accomplish the resolution of the entire--
Unknown Speaker: Let me make--
--the case a little harder for you, and then... supposing some of us felt that we shouldn't look at legislative history.
Then it would be a little bit harder to explain, wouldn't it?
Mr. Jones: --No.
That's my legal point.
Legally it would still be irrelevant, because it is quite clear that exclusions from income are not to be obtained by inference.
You cannot use a negative inference out of the 1989 amendment to create... to do what frankly what this Court said in its footnote in Burke, that this amendment allows the recovery of punitive damages in physical injury cases.
Unknown Speaker: This isn't a negative inference.
This is simply application of the usual rule that you interpret every word of a statute as having some effect.
Those words except for, you know... except for punitive damages in these other areas would have been totally unnecessary.
Mr. Jones: But that's not the way it's written, Justice Scalia.
What the 1989--
Unknown Speaker: Where is the text?
I don't have the text right in front of me.
Is it in your brief at some point?
Mr. Jones: --Yes, I'm sure that it is.
Unknown Speaker: The way Justice Blackmun described it in Burke was that the enactment allowed exclusion of punitive damages only in cases involving physical injury or physical sickness.
Mr. Jones: What... at page 30 of our brief, Justice Scalia--
Unknown Speaker: Okay.
Mr. Jones: --we quote the provisions from the 1989 act.
Unknown Speaker: Thank you.
Mr. Jones: And what it says is--
Unknown Speaker: Whereabouts on page 30?
Mr. Jones: --In the middle of the full paragraph.
It says, the House bill was modified to provide only that the section 104(a)(2) exclusion shall not apply to any punitive damages received in connection with a case not involving physical injury.
To take that to mean the positive you have to infer that therefore any punitive damages awarded in a case involving punitive... involving physical injuries is to be excluded.
That's the kind of exclusion by implication that as a matter of statutory construction this Court would not--
Unknown Speaker: But my point is, unless that is what Congress... I don't care what Congress had in mind unless that's what the text--
--of the statute had in mind.
The language with a case not involving physical injury or physical sickness could have simply been left out.
In order to give that phrase any meaning, you must assume that where it is a case involving physical injury or physical sickness, punitive damages are included within the exemption.
Mr. Jones: --The way that the provision had read... I'm speaking from memory now.
This isn't in here, although it's described in here.
The way the provision read before it was amended in conference would have provided that amounts atrib... punitive damages received in connection with a claim involved in puni... physical injury are excluded.
In other words, it would have said exactly what you're saying it should be inferred this--
Unknown Speaker: So you're using legislative history again.
Mr. Jones: --Well--
Unknown Speaker: I thought we were just going to look at the text.
Mr. Jones: --Well, I--
Unknown Speaker: Looking at the text, there is no other explanation for the whole phrase, in connection with a case not involving physical injury or physical sickness.
You may as well have dropped it out entirely unless you assume that in those cases it is within the exemption.
What you're saying, I take it, Mr. Jones, is that Congress wished to deal with this particular category--
Mr. Jones: --Yes.
Unknown Speaker: --and leave what wasn't covered there to the preexisting law.
Mr. Jones: Absolutely, and I think, Justice Scalia, with all respect, that that's exactly what the statute indicates, and the only point I'm making... well, there's two points.
One is, none of this matters to the resolution of this case, but the other point is, this Court has often said, and I think it's an important holding, that exclusions from income are nonimplied.
That is to say, there must be an express exclusion, and to create an inference out of these two negatives is not unimaginable, it's just not consistent with the way that the Court would approach these kinds of questions.
Unknown Speaker: Mr. Jones, you quoted... and maybe it's on the same page.
You quoted I think someone who expressly drew the conclusion that Congress meant to treat only this subject and to leave--
Mr. Jones: Yes.
Unknown Speaker: --all other application... was that in a law journal article, or was that in the legislative history?
Mr. Jones: Well, what we quoted was his article, but what he relies on is the legislative history in detail.
I've read the article, and he has a very detailed explanation of the various drafts of the bill and the statements within the committee.
If that issue were relevant to the disposition of the case, I would refer the Court to that more detailed discussion on that subject.
I also need to correct what I believe is a fundamental misstatement of counsel on this issue.
Having heard his argument, I would get the impression that most courts had interpreted the '89 amendment to help their case.
In fact, all but one of the courts of appeals have said about this 1989 amendment almost exactly what I've just said to the Court, that it doesn't address this issue, it addresses a different issue, it consciously addressed a narrow issue, and consciously left this other issue untouched, just as Congress did in the '96 amendment, where they prospectively authoritatively determined punitive damages are not within the statutory exclusion, which really brings me to my last point.
In our view, and in the view of the tax court in the Bagley case, this Court's opinion in Schleier resolved this issue.
It says that damages that are punitive in nature and not compensatory are not within the statutory exclusion precisely because they're not awarded on account of the personal injury.
That is exactly what the Treasury said in its 1984 ruling on this subject.
It said that the punitive damages are not on account of the injury, they're not compensation for the injury, they're not within the statutory exclusion.
Unknown Speaker: Mr. Jones, were you going to address the statute of limitations problem in this case?
Mr. Jones: I... that will be my next point.
I think I have time.
The... Schleier being only 18 months old, I mean, it seems obvious to point out that the principles of stare decisis are very strong in tax cases, and they should be especially strong in this context, where Congress has prospectively reached the same conclusion in amending the statute for all tax years this day forward.
Unknown Speaker: I assume you think we ought to disavow the footnote in Burke.
Mr. Jones: I think the footnote in Burke was dicta, and I think it's honest to say that the Court wasn't briefed on that issue, and other courts have said that they believe that that statement was dicta.
Clearly... and the 1989 amendment has not yet actually been before the Court, although this is the third section--
Unknown Speaker: I know, but it really would be ironic if we were to say the law was pretty clear up to '89, and that's all involved now, and it's clear now after '96, but in this interval, if you read the statute on its face during that period, someone might say, well, there's a different result in here, and that's why... one of the things that concerns me.
Mr. Jones: --I think that's why the '96 amendment was--
Unknown Speaker: That takes care of everything--
Mr. Jones: --Prospectively.
Unknown Speaker: --Right.
Mr. Jones: I mean, it removes the shadow that--
Unknown Speaker: Can we decide this case without the effect of the '89 amendment, but around the corner there may be a case that arose in 1991 that squarely presents the question whether the footnote in Burke was right or not.
Mr. Jones: --I would hope, and I'm sure the Court would hope that that case doesn't come around the corner.
Unknown Speaker: You don't think any punitive damages were awarded during those years?
I doubt it.
Mr. Jones: But in all--
Unknown Speaker: It would have been in circuits... there was only one outlying circuit--
Mr. Jones: --That's correct.
Unknown Speaker: --so the circuits have--
Mr. Jones: The circuits have not had any difficulty with this issue about the '89 amendment.
On the statute of limitations, petitioners claim that the statute of limitations for suits to recover an erroneous refund expired before this suit was brought by the Government.
That contention is wrong for two reasons.
First, petitioners don't dispute that they did not raise this issue in the district court, and when they raised it in the court of appeals, they did so solely on the theory that a failure to comply with the statute of limitations would deprive the court of subject matter jurisdiction.
Now, as we state in our brief, and as petitioners do not address at all, this is an ordinary type of statute of limitations that limits only the recovery on the claim.
It does not limit the jurisdiction of the court.
Thus, even if the statute of limitations had not been complied with, this Court would have jurisdiction, the lower courts would have jurisdiction, and such a holding would therefore have no remedial significance.
They can't raise at this point a suggestion that the failure to comply with the statute was an affirmative defense, because they waived the issue by not raising it in the district court.
Unknown Speaker: --But they answered that you in turn waived because you didn't mention that in your brief in opposition.
Mr. Jones: And my point on that issue is that the Court, because this relates only to subject matter jurisdiction, the Court has to decide, it seems to me, first whether this claim relates to subject matter jurisdiction, because if it just decided the statute of limitations issue as an unanchored legal principle, it would have no remedial significance in this case and the Court rarely, to my knowledge has never decided an issue that doesn't have remedial significance.
Unknown Speaker: Well, I thought that their argument was simply, if we waived, then your failing to bring up... to challenge the Tenth Circuit ruling... the Tenth Circuit ruling was in favor of... the Tenth Circuit ruling was in favor of the Government, right?
Mr. Jones: On the merits.
Unknown Speaker: Yes.
Mr. Jones: On the merits of the statute.
Unknown Speaker: Right.
Right, and then they challenged that here, and you didn't object to it.
Mr. Jones: Only on the merits.
We didn't point out, as we--
Unknown Speaker: And everybody agrees... well, that this is not a statute of limitations that operates against the taxpayer, or no question of sovereign immunity, so... no one has said this is jurisdictional.
Mr. Jones: --Oh, well, that's their... that's the only basis on which they have raised it, even to this point, and it's the only basis on which the Court could address it.
I... it's, just to repeat myself, but I think it's the reason why even if under... the Court might say, well, you... the Government didn't raise this point.
The point that we didn't raise is that this statute doesn't relate to subject matter jurisdiction.
Well, I suppose that's a jurisdictional point, and I suppose the Court has to decide whether it relates to subject matter jurisdiction before it decides--
Unknown Speaker: Well, if we can just get to the merits--
Mr. Jones: --Yes.
Unknown Speaker: --you may be right that they're waived.
One question that I had is on the question of the date of payment.
Is it the receipt, or... there's a section of the code, 6602, that talks about interest due to the Government when the Government overpays the taxpayer then gets back the overpayment with the interest.
Mr. Jones: Yes.
Unknown Speaker: What is the date from which the interest runs?
It says that the interest is due... what is it, what are the words?
I have the statute here.
The interest... shall bear interest from the date of the payment of the refund.
What is the date of the payment for purposes of the interest provision?
Mr. Jones: I don't have the text of that in front of me, but as you've described it, I'm not... I don't hear any words that would lead me to think that it would be different from the date of the payment, the making of the refund in this context, because what the Court held in United States v. Wurtz is that the date of the making of the refund is the date on which the refund was paid.
Unknown Speaker: Well, it really... it didn't make any difference in Wurtz.
The key thing was that they rejected the one date that would have made the claim too late.
Mr. Jones: Well, let me see if I can put this point in perspective, just to state it from the beginning.
Unknown Speaker: The reason that I ask the question is, if the Government's calculation of interest has to depend on the date of receipt, the Government won't know that.
I mean, it knows when it mails the check, but it doesn't know... so when it reclaims the overpayment and sends the interest bill at the same time, how will it know the starting date for the interest, because it doesn't know the date of receipt?
Mr. Jones: --Justice Ginsburg, you've triggered a recollection that is only vague for me.
I believe that there may be a regulation, or even an additional statutory provision that addresses the precise point you're making under that interest statute, and I do not remember exactly what it says, so I'm afraid I can't be of too much help to you on that, other than to say that I do believe that there's some specific substantive provision of law that has been adopted to address that point.
Unknown Speaker: Is there, then, if you don't... is there any reason... what I thought of doing to answer this is to look up how the law works in the area of contracts and how it works in the area of money had and received, say an insurance company that makes an erroneous refund.
How does the statute of limitations work there?
My guess, from recollecting my first year of law of contracts is that the contract is good when it's... the acceptance is mailed--
Mr. Jones: Well--
Unknown Speaker: --and therefore the statute of limitations would run from that time, and I bet it's the same with money had and received, that it's made--
Mr. Jones: --Well, a contract may be made by putting it in the mail as a matter of common law rule.
Unknown Speaker: --No, but bills--
Mr. Jones: A refund--
Unknown Speaker: --Notes under NI... normal law in making is the date on the check.
Mr. Jones: --And that may also be true--
Unknown Speaker: Yes.
Mr. Jones: --but what's relevant here is that what has to be made is a refund, and what the Court said in Wurtz is that a refund is the actual repayment.
It's not a contract, it's not a check--
Unknown Speaker: But it said that in rejecting an argument that you should look at the date when the refund was authorized, which was clearly wrong.
It really didn't focus on this distinction.
Mr. Jones: --Oh, I don't think it focused on it, but I think in--
Unknown Speaker: It did use the words, date of payment.
Mr. Jones: --And every... and I should point out every court that has addressed this issue has concluded--
Unknown Speaker: Well, refund at least requires delivery.
I mean, if the Government simply draws a check and keeps it, surely nothing is started.
Mr. Jones: --Oh, of course not, and as this Court did say in Wurtz, and I think it answers this question if the other part that I've quoted doesn't, is that a payment, which the Court said is what a refund is, a payment isn't made even when the check is mailed and... signed and mailed--
Unknown Speaker: Why would we want one rule for--
Mr. Jones: --because the payment can be stopped.
Unknown Speaker: --Why would we want one rule when an insurance company makes a refund, or any private person, and the Government have a different rule when it's totally silent on the matter?
Why wouldn't a refund for the law be good on mailing or not good on mailing for everybody alike?
Mr. Jones: Well, one... one obvious difference is that... is this Court's law in addition to Wurtz.
I think Wurtz answers this question, but even if one wanted to look beyond Wurtz--
Unknown Speaker: Well, isn't Wurtz a little bit like Burke in that respect?
All Wurtz has to do is to say that the time hasn't run, period.
It had to reject one reading.
Whatever it said about... there were a number of dates you could pick.
Only one was out of the ball park.
Mr. Jones: --I think the difference is that in Wurtz we're talking about the ratio decidendi of the Court, and in Burke we were talking about a footnote that related to a statute that wasn't before the Court and wasn't involved.
The ratio decidendi of Burke... of Wurtz was that a refund is an actual repayment.
it is not simply putting the check in the mail, because the check can be cancelled and the payment stopped, as the Court said.
Now, there's one other reason--
Unknown Speaker: Well then, if that's... if that really is the criterion, then it's the date of negotiating the check.
Mr. Jones: --Well, I think that might be the most--
Unknown Speaker: You can stop payment while it's in the recipient's hand.
Mr. Jones: --That might be the most faithful application of the statute, and frankly I--
Unknown Speaker: But then you said it would be the same thing for the interest, and so the interest, that would be even more uncertain, the date the check is cashed.
Mr. Jones: --I want to make it clear, Justice Ginsburg, that I don't believe I have a view on the interest issue at this point.
I'm just not in a position to give you an answer on that.
Unknown Speaker: But the Government is not going to know when the statute of limitations runs, if in fact it isn't the time it mailed, but the time it's received by somebody.
Mr. Jones: The Court pointed out in Wurtz that it is implausible to think that Congress started the statute of limitations running on a date before the cause of action accrued.
The cause of action here accrues only when the payment is made.
It does not accrue simply by putting a check in the mail.
We can't sue someone for an erroneous refund because we sent them a check.
We can sue them because they received money that we want back.
Unknown Speaker: Of course, if you use what you say may be the most faithful position, which is at the time the payment is actually made by the Government, the Government would know that.
Mr. Jones: Yes, they would, and when... and there would be records on that.
Unknown Speaker: And you don't exclude that as a possibility.
Mr. Jones: As I said, I think that's the most faithful reading of the statute.
It's a reading that some courts have adopted.
There are two district court opinions that have stopped short and said it's the date of receipt, but under any interpretation that any court has ever expressed, the Government wins in this case.
Unknown Speaker: But the Government doesn't win if it's the date of mailing.
Mr. Jones: That would be the only circumstance in which the Government would not win, and there's no authority to support that proposition.
Unknown Speaker: And in any event you say this was waived.
Mr. Jones: In any event, we believe it was quite clearly waived.
If there are no further questions, I'm through.
Unknown Speaker: Thank you, Mr. Jones.
Mr. McAllister, you have 2 minutes remaining.
Do you agree that if we don't hold the statute jurisdictional that you have waived it?
Rebuttal of Stephen R. McAllister
Mr. McAllister: No, I don't, Your Honor.
I believe that we raised the issue in the Tenth Circuit.
The Tenth Circuit addressed it on the merits, and under this Court's rules the Government had an obligation to object to any procedural problem in its response to our petition for writ of certiorari.
It did not do so, so I believe in effect it has waived any objection, and this Court now, under its precedents, is entitled to reach that issue on the merits, and I do not believe it makes a difference whether it's treated as subject matter jurisdiction or not.
Unknown Speaker: You did admit that the refund was made on July 9 in the answer to the complaint.
Mr. McAllister: What the stipulation says is the amounts were refunded.
They do not... and basically what that means is--
Unknown Speaker: Well, but your answer to the complaint is not inconsistent with that stip.
In the answer to the complaint you admitted that it was July 9.
Mr. McAllister: --The amount was refunded on July 9.
What that meant was that was the date on which the check was received, but it didn't say that the refund was made, and in our view making should refer to the last act basically the Government needs to perform to complete the process, which was after it's issued the check, put it in the mail to the taxpayer.
At that point, the Government has made its determination, the money is on its way, and at that point, that is really the last point at which the Government can know with certainty its window of opportunity has begun to run.
Unknown Speaker: Well, you wouldn't make that argument if you never received the check, would you?
Mr. McAllister: --No.
We would certainly suggest that if we had not received the check, the Government--
Unknown Speaker: The Government wouldn't be suing to get it back, either--
Mr. McAllister: --That's right.
There would be no case.
Unknown Speaker: --if you never received it.
But it might be saying--
--Sort of a nonexistent problem.
It might be saying that it had made the refund.
Mr. McAllister: It might.
Unknown Speaker: Do you know how it works with a private company?
Mr. McAllister: With a private company, I do not, Your Honor.
I do know the mailbox rule for contract law.
Unknown Speaker: So that might be the right rule, but nobody's... we haven't looked it up yet.
Mr. McAllister: Right.
We did talk about the mailbox rule in contract law in our reply brief.
One point I'd like to make--
Unknown Speaker: Was it just oversight that you didn't bring this up in the first instance?
Mr. McAllister: --In the first instance, yes, Your Honor.
The 1989 amendment, if I could go back to that for a moment, this Court in Burke in a footnote did suggest that it has the reading, and certainly the Congress understood what we claim Congress understood in section... or in 1989 about--
Unknown Speaker: All of these tax years were all before 1989 though, weren't they?
Mr. McAllister: --Right.
Unknown Speaker: So in fact the way the law read at the time that's relevant here did not contain the 1989 amendment.
Mr. McAllister: Correct.
Chief Justice Rehnquist: Thank you, Mr. McAllister.
Mr. McAllister: Thank you.
Chief Justice Rehnquist: The case is submitted.