O'Gilvie Minors v. United States (95-966), 519 U.S. 79 (1996)
[ Breyer ]
[ Scalia ]
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NOTICE: This opinion is subject to formal revision before publication in the preliminary print of the United States Reports. Readers are requested to notify the Reporter of Decisions, Supreme Court of the United States, Washington, D.C. 20543, of any typographical or other formal errors, in order that corrections may be made before the preliminary print goes to press.


Nos. 95-966 and 95-977


on writs of certiorari to the united states court of appeals for the tenth circuit

[December 10, 1996]

Justice Breyer delivered the opinion of the Court.

"amount of any damages received (whether by suit or agreement and whether as lump sums or as periodic payments) on account of personal injuries or sickness." 26 U.S.C. § 104(a)(2) (1988 ed.) (emphasis added).

The issue before us is whether this provision applies to (and thereby makes nontaxable) punitive damages received by a plaintiff in a tort suit for personal injuries. We conclude that the punitive damages received here were not received "on account of" personal injuries; hence the provision does not apply and the damages are taxable.

Petitioners in this litigation are the husband and two children of Betty O'Gilvie, who died in 1983 of toxic shock syndrome. Her husband, Kelly, brought a tort suit (on his own behalf and that of her estate) based on Kansas law against the maker of the product that caused Betty O'Gilvie's death. Eventually, he and the two children received the net proceeds of a jury award of $1,525,000 actual damages and $10 million punitive damages. Insofar as the proceeds represented punitive damages, petitioners paid income tax on the proceeds but immediately sought a refund.

The litigation before us concerns petitioners' legal entitlement to that refund. Procedurally speaking, the litigation represents the consolidation of two cases brought in the same Federal District Court: Kelly's suit against the Government for a refund, and the Government's suit against the children to recover the refund that the Government had made to the children earlier. 26 U.S.C. § 7405(b) (authorizing suits by the United States to recover refunds erroneously made). The Federal District Court held on the merits that the statutory phrase "damages . . . on account of personal injury or sickness," includes punitive damages, thereby excluding punitive damages from gross income and entitling Kelly to obtain, and the children to keep, their refund. The Court of Appeals for the Tenth Circuit, however, reversed the District Court. Along with the Fourth, Ninth and Federal Circuits, it held that the exclusionary provision does not cover punitive damages. Because the Sixth Circuit has held the contrary, the Circuits are divided about the proper interpretation of the provision. We granted certiorari to resolve this conflict.

Petitioners received the punitive damages at issue here "by suit,"--indeed "by" an ordinary "suit" for "personal injuries." Contrast United States v. Burke, 504 U.S. 229 (1992) (§104(a)(2) exclusion not applicable to backpay awarded under Title VII of the Civil Rights Act of 1964 because the claim was not based upon " `tort or tort type rights,' " id., at 233); Commissioner v. Schleier, 515 U. S. ___ (1995) (alternative holding) (Age Discrimination in Employment Act of 1967 (ADEA) claim is similar to Title VII claim in Burke in this respect). These legal circumstances bring those damages within the gross income exclusion provision, however, only if the petitioners also "received" those damages "on account of " the "personal injuries." And the phrase "on account of " does not unambiguously define itself.

On one linguistic interpretation of those words, that of petitioners, they require no more than a "but for" connection between "any" damages and a lawsuit for personal injuries. They would thereby bring virtually all personal injury lawsuit damages within the scope of the provision, since: "but for the personal injury, there would be no lawsuit, and but for the lawsuit, there would be no damages."

On the Government's alternative interpretation, however, those words impose a stronger causal connection, making the provision applicable only to those personal injury lawsuit damages that were awarded by reason of, or because of, the personal injuries. To put the matter more specifically, they would make the section inapplicable to punitive damages, where those damages

" `are not compensation for injury [but] [i]nstead . . . are private fines levied by civil juries to punish reprehensible conduct and to deter its future occurrence.' " Electrical Workers v. Foust, 442 U.S. 42, 48 (1979), quoting Gertz v. Robert Welch, Inc., 418 U.S. 323, 350 (1974) (footnote omitted).

The Government says that such damages were not "received . . . on account of" the personal injuries, but rather were awarded "on account of " a defendant's reprehensible conduct and the jury's need to punish and to deter it. Hence, despite some historical uncertainty about the matter, see Rev. Rul. 75-45, 1975-1 Cum. Bull. 47, revoked by Rev. Rul. 84-108, 1984-2 Cum. Bull. 32, the Government now concludes that these punitive damages fall outside the statute's coverage.

We agree with the Government's interpretation of the statute. For one thing, its interpretation gives the phrase "on account of " a meaning consistent with the dictionary definition. See, e.g., Webster's Third New International Dictionary 13 (1981) ("for the sake of: by reason of: because of ").

More important, in Schleier, supra, we came close to resolving the statute's ambiguity in the Government's favor. That case did not involve damages received in an ordinary tort suit; it involved liquidated damages and backpay received in a settlement of a lawsuit charging a violation of the Age Discrimination in Employment Act. Nonetheless, in deciding one of the issues there presented (whether the provision now before us covered ADEA liquidated damages), we contrasted the elements of an ordinary tort recovery with ADEA liquidated damages. We said that pain and suffering damages, medical expenses, and lost wages in an ordinary tort case are covered by the statute and hence excluded from income

"not simply because the taxpayer received a tort settlement, but rather because each element . . . satisfies the requirement . . . that the damages were received `on account of personal injuries or sickness.' " Id., at ___ (slip op., at 6-7).

In holding that ADEA liquidated damages are not covered, we said that they are not "designed to compensate ADEA victims," id., at ___, n. 5 (slip op., at 9, n. 5); instead, they are " `punitive in nature,' " id., at ___ (slipop., at 8) (quoting Trans World Airlines, Inc. v. Thurston, 469 U.S. 111, 125 (1985)).

Applying the same reasoning here would lead to the conclusion that the punitive damages are not covered because they are an element of damages not "designed to compensate . . . victims," Schleier, 515 U. S., at ___ (slip op., at 9, n. 5); rather they are " `punitive in nature.' " Ibid. Although we gave other reasons for our holding in Schleier as well, we explicitly labeled this reason an "independent" ground in support of our decision, id., at ___ (slip op., at 11). We cannot accept petitioners' claim that it was simply a dictum.

We also find the Government's reading more faithful to the history of the statutory provision as well as the basic tax related purpose that the history reveals. That history begins in approximately 1918. At that time, this Court had recently decided several cases based on the principle that a restoration of capital was not income; hence it fell outside the definition of "income" upon which the law imposed a tax. E.g., Doyle v. Mitchell Brothers Co., 247 U.S. 179, 187 (1918); Southern Pacific Co. v. Lowe, 247 U.S. 330, 335 (1918). The Attorney General then advised the Secretary of the Treasury that proceeds of an accident insurance policy should be treated as nontaxable because they primarily

"substitute . . . capital which is the source of future periodical income . . . merely tak[ing] the place of capital in human ability which was destroyed by the accident. They are therefore [nontaxable] `capital' as distinguished from `income' receipts." 31 Op. Atty. Gen. 304, 308 (1918).

The Treasury Department added that

"upon similar principles . . . an amount received by an individual as the result of a suit or compromise for personal injuries sustained by him through accident is not income [that is] taxable. . . ." T. D.

2747, 20 Treas. Dec. Int. Rev. 457 (1918).

Soon thereafter, Congress enacted the first predecessor of the provision before us. That provision excluded from income

"[a]mounts received, through accident or health insurance or under workmen's compensation acts, as compensation for personal injuries or sickness, plus the amount of any damages received whether by suit or agreement on account of such injuries or sickness." Revenue Act of 1918, ch. 18, §213(b)(6), 40 Stat. 1066.

The provision is similar to the cited materials from the Attorney General and the Secretary of the Treasury in language and structure, all of which suggests that Congress sought, in enacting the statute, to codify the Treasury's basic approach. A contemporaneous House Report, insofar as relevant, confirms this similarity of approach, for it says:

"Under the present law it is doubtful whether amounts received through accident or health insurance, or under workmen's compensation acts, as compensation for personal injury or sickness, and damages received on account of such injuries or sickness, are required to be included in gross income. The proposed bill provides that such amounts shall not be included in gross income." H. R. Rep. No. 767, pp. 9-10 (1918).

This history and the approach it reflects suggest there is no strong reason for trying to interpret the statute's language to reach beyond those damages that, making up for a loss, seek to make a victim whole, or, speaking very loosely, "return the victim's personal or financial capital."

We concede that the original provision's language does go beyond what one might expect a purely tax policy related "human capital" rationale to justify. That is because the language excludes from taxation not only those damages that aim to substitute for a victim's physical or personal well being--personal assets that the Government does not tax and would not have taxed had the victim not lost them. It also excludes from taxation those damages that substitute, say, for lost wages, which would have been taxed had the victim earned them. To that extent, the provision can make the compensated taxpayer better off from a tax perspective than had the personal injury not taken place.

But to say this is not to support cutting the statute totally free from its original moorings in victim loss. The statute's failure to separate those compensatory elements of damages (or accident insurance proceeds) one from the other does not change its original focus upon damages that restore a loss, that seek to make a victim whole, with a tax equality objective providing an important part of, even if not the entirety of, the statute's rationale. All this is to say that the Government's interpretation of the current provision (the wording of which has not changed significantly from the original) is more consistent than is petitioners' with the statute's original focus.

Finally, we have asked why Congress might have wanted the exclusion to have covered these punitive damages, and we have found no very good answer. Those damages are not a substitute for any normally untaxed personal (or financial) quality, good, or "asset." They do not compensate for any kind of loss. The statute's language does not require, or strongly suggest, their exclusion from income. And we can find no evidence that congressional generosity or concern for administrative convenience stretched beyond the bounds of an interpretation that would distinguish compensatory from noncompensatory damages.

Of course, as we have just said, from the perspective

of tax policy one might argue that noncompensatory punitive damages and, for example, compensatory lost wages are much the same thing. That is, in both instances, exclusion from gross income provides the taxpayer with a windfall. This circumstance alone, however, does not argue strongly for an interpretation that covers punitive damages, for coverage of compensatory damages has both language and history in its favor to a degree that coverage of noncompensatory punitive damages does not. Moreover, this policy argument assumes that coverage of lost wages is something of an anomaly; if so, that circumstance would not justify the extension of the anomaly or the creation of another. See Wolfman, Current Issues of Federal Tax Policy, 16 U. Ark. Little Rock L. J. 543, 549-550 (1994) ("[T]o build upon" what is, from a tax policy perspective, the less easily explained portion "of the otherwise rational exemption for personal injury," simply "does not make sense").

Petitioners make three sorts of arguments to the contrary. First, they emphasize certain words or phrases in the original, or current, provision that work in their favor. For example, they stress the word "any" in the phrase "any damages." And they note that in both original and current versions Congress referred to certain amounts of money received (from workmen's compensation, for example) as "amounts received . . . as compensation," while here they refer only to "damages received" without adding the limiting phrase "as compensation." 26 U.S.C. § 104(a); Revenue Act of 1918, §213(b)(6), 40 Stat. 1066. They add that in the original version, the words "on account of personal injuries" might have referred to, and modified, the kind of lawsuit, not the kind of damages. And they find support for this view in the second sentence of the Treasury Regulation first adopted in 1958 which says:

"The term `damages received (whether by suit or agreement' means an amount received (other than workmen's compensation) through prosecution of a legal suit or action based upon tort or tort type rights, or through a settlement agreement entered into in lieu of such prosecution." 26 CFR § 1.104-1(c) (1996).

These arguments, however, show only that one can reasonably read the statute's language in different ways--the very assumption upon which our analysis rests. They do not overcome our interpretation of the provision in Schleier, nor do they change the provision's history. The help that the Treasury Regulation's second sentence gives the petitioners is offset by its first sentence, which says that the exclusion applies to damages received "on account of personal injuries or sickness," and which we have held sets forth an independent requirement. Schleier, 515 U. S., at ___ (slip op., at 14). See Appendix, infra, at 16.

Second, petitioners argue that to some extent the purposes that might have led Congress to exclude, say, lost wages from income would also have led Congress to exclude punitive damages, for doing so is both generous to victims and avoids such administrative problems as separating punitive from compensatory portions of a global settlement or determining the extent to which a punitive damages award is itself intended to compensate.

Our problem with these arguments is one of degree. Tax generosity presumably has its limits. The administrative problem of distinguishing punitive from compensatory elements is likely to be less serious than, say, distinguishing among the compensatory elements of a settlement (which difficulty might account for the statute's treatment of, say, lost wages). Cf. supra p. 8. And, of course, the problem of identifying the elements of an ostensibly punitive award does not exist where, as here, relevant state law makes clear that the damages at issue are not at all compensatory, but entirely punitive. Brewer v. Home Stake Production Co., 200 Kan. 96, 100, 434 P. 2d 828, 831 (1967) ("[E]xemplary damages are not regarded as compensatory in any degree"); accord, Smith v. Printup, 254 Kan. 315, 866 P. 2d 985 (1993); Folks v. Kansas Power & Light Co., 243 Kan. 57, 755 P. 2d 1319 (1988); Nordstrom v. Miller, 227 Kan. 59, 605 P. 2d 545 (1980).

Third, petitioners rely upon a later enacted law. In 1989, Congress amended the law so that it now specifically says the personal injury exclusion from gross income

"shall not apply to any punitive damages in connection with a case not involving physical injury or physical sickness." 26 U.S.C. § 104(a) (1994).

Why, petitioners ask, would Congress have enacted this amendment removing punitive damages (in nonphysical injury cases) unless Congress believed that, in the amendment's absence, punitive damages did fall within the provision's coverage?

The short answer to this question is that Congress might simply have thought that the then current law about the provision's treatment of punitive damages--in cases of physical and nonphysical injuries--was unclear, that it wanted to clarify the matter in respect to nonphysical injuries, but it wanted to leave the law where it found it in respect to physical injuries. The fact that the law was indeed uncertain at the time supports this view. Compare Rev. Rul. 84-108, 1984-2 Cum. Bull. 32, with e.g., Roemer v. Commissioner, 716 F. 2d 693 (CA9 1983); Miller v. Commissioner, 93 T. C. 330 (1989), rev'd 914 F. 2d 586 (CA4 1990).

The 1989 amendment's legislative history, insofar as relevant, offers further support. The amendment grew out of the Senate's refusal to agree to a House bill that would have made all damages in nonphysical personal injury cases taxable. The Senate was willing to specify only that the Government could tax punitive damages in such cases. Compare H. R. Rep. No. 101-247, p. 1355 (1989), with H. R. Conf. Rep. No. 101-386, pp. 622-623 (1989). Congress' primary focus, in other words, was upon what to do about nonphysical personal injuries, not upon the provision's coverage of punitive damages under pre-existing law.

We add that, in any event, the view of a later Congress cannot control the interpretation of an earlier enacted statute. United States v. Price, 361 U.S. 304 (1960); Higgins v. Smith, 308 U.S. 473 (1940). But cf. Burke, 504 U. S., at 235, n. 6 (including a passing reference to the 1989 amendment, in dicta, as support for a view somewhat like that of petitioners).

(Although neither party has argued that it is relevant, we note in passing that §1605 of the Small Business Job Protection Act of 1996, Pub. L. 104-188, 110 Stat. 1838, explicitly excepts most punitive damages from the exclusion provided by §104(a)(2). Because it is of prospective application, the section does not apply here. The Conference Report on the new law says that "[n]o inference is intended" as to the proper interpretation of section 104(a)(2) prior to amendment. H. R. Conf. Rep. No. 104-737, p. 301 (1996).)

The upshot is that we do not find petitioners' arguments sufficiently persuasive. And, for the reasons set out above, supra, at 3-8, we agree with the Government's interpretation of the statute.

Petitioners have raised two further issues, specific to the procedural posture of this litigation. First, the O'Gilvie children point out that the Government had initially accepted their claim for a refund and wrote those checks on July 6, 1990. The Government later changed its mind and, on July 9, 1992, two years plus three days later, filed suit against them seeking the return of are fund erroneously made. 26 U.S.C. § 7405(b) (authorizing a "civil action brought in the name of the United States" to recover any "portion of a tax . . . which has been erroneously refunded"). They add that the relevant statute of limitations specifies that recovery of the refund "shall be allowed only if such suit is begun within 2 years after the making of such refund." §6532(b).

The children concede that they received the refund checks on July 9, 1990, and they agree that if the limitation period runs from the date of receipt--if, as the Government argues, that is the date of the "making of " the refund--the Government's suit was timely. But the children say that the refund was made on, and the limitations period runs from, the date the Government mailed the checks (presumably July 6, 7, or 8) in which case the Government brought this suit one or two or three days too late.

In our view, the Government is correct in its claim that its lawsuit was timely. The language of the statute admits of both interpretations. But the law ordinarily provides that an action to recover mistaken payments of money "accrues upon the receipt of payment," New Bedford v. Lloyd Investment Associates, Inc., 363 Mass. 112, 119, 292 N. E. 2d 688, 692 (1973); accord Sizemore v. E. T. Barwick Industries, Inc., 225 Tenn. 226, 233, 465 S. W. 2d 873, 876 (1971) (" `the time of making the . . . payment . . . was the date of actual receipt' "), unless, as in some States and in some cases, it accrues upon the still later date of the mistake's discovery, see Allen & Lamkin, When Statute of Limitations Begins to Run Against Action to Recover Money Paid By Mistake, 79 A. L. R. 3d 754, 766-769 (1977). We are not aware of any good reason why Congress would have intended a different result where the nature of the claim is so similar to a traditional action for money paid by mistake--an action the roots of which can be found in the old common law claim of "assumpsit" or "money had and received." New Bedford, supra, at 118. The lower courts and commentators have reached a similar conclusion. United States v. Carter, 906 F. 2d 1375 (CA9 1990); Akers v. United States, 541 F. Supp. 65, 67 (M. D. Tenn. 1981); United States v. Woodmansee, 388 F. Supp. 36, 46 (N. D. Cal. 1975), rev'd on other grounds, 578 F. 2d 1302 (CA9 1978); 14 J. Mertens Law of Federal Income Taxation §54A.69 (1995); Kafka & Cavanagh, Litigation of Federal Civil Tax Controversies §20.03, p. 20-15 (2d ed. 1995). That conclusion is consistent with dicta in an earlier case from this Court, United States v. Wurts, 303 U.S. 414, 417-418 (1938), as well as with this Court's normal practice of construing ambiguous statutes of limitations in Government action in the Government's favor. E.g., Badaracco v. Commissioner, 464 U.S. 386, 391 (1984).

We concede the children's argument that a "date of mailing" interpretation produces marginally greater certainty, for such a rule normally would refer the court to the postmark to establish the date. But there is no indication that a "date of receipt" rule has proved difficult to administer in ordinary state or common law actions for money paid erroneously. The date the check clears, after all, sets an outer bound.

Second, Kelly O'Gilvie says that the Court of Appeals should not have considered the Government's original appeal from the District Court's judgment in his favor because, in his view, the Government filed its notice of appeal a few days too late. The Court of Appeals describes the circumstances underlying this case specific issue in its opinion. We agree with its determination of the matter for the reasons it has there set forth.

The judgment of the Court of Appeals is



Section 104(a), in 1988, read as follows:

"Compensation for injuries or sickness

"(a) In general.--Except in the case of amounts attributable to (and not in excess of) deductions allowed under section 213 (relating to medical, etc., expenses) for any prior taxable year, gross income does not include--

"(1) amounts received under workmen's compensation acts as compensation for personal injuries or sickness;

"(2) the amount of any damages received (whether by suit or agreement and whether as lump sums or as periodic payments) on account of personal injuries or sickness;

"(3) amounts received through accident or health insurance for personal injuries or sickness (other than amounts received by an employee, to the extent such amounts (A) are attributable to contributions by the employer which were not includible in the gross income of the employee, or (B) are paid by the employer);

"(4) amounts received as a pension, annuity, or similar allowance for personal injuries or sickness resulting from active service in the armed forces of any country or in the Coast and Geodetic Survey or the Public Health Service, or as a disability annuity payable under the provisions of section 808 of the Foreign Service Act of 1980; and

"(5) amounts received by an individual as disability income attributable to injuries incurred as a direct result of a violent attack which the Secretary of State determines to be a terrorist attack and which occurred while such individual was an employee of the United States engaged in the performance of his official duties outside the United States." 26 U.S.C. § 104 (1988 ed.).

In 1989, §104(a) was amended, adding, among other things, the following language:

"Paragraph (2) shall not apply to any punitive damages in connection with a case not involving physical injury or physical sickness." 26 U.S.C. § 104(a) (1994).

Treasury Regulation §1.104-1(c) provides:

"Section 104(a)(2) excludes from gross income the amount of any damages received (whether by suit or agreement) on account of personal injuries or sickness. The term `damages received (whether by suit or agreement)' means an amount received (other than workmen's compensation) through prosecution of a legal suit or action based upon tort or tort type rights, or through a settlement agreement entered into in lieu of such prosecution." 26 CFR § 1.104-1(c) (1996).