Respondents Brief — Lukhard v. Reed

a

Supreme Court, us. FF

rITLeE D

sug oy 1986

In the Supreme Court of the Bnitky' tates

OCTOBER TERM, 1986

WILLIAM L. LUKHARD, COMMISSIONER OF THE

VIRGINIA DEPARTMENT OF SOCIAL SERVICES, PETITIONER

yy.

ONA MAE REED, ET AL.

ON WRIT OF CERTIORARI TO

THE UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

BRIEF FOR THE

SECRETARY OF HEALTH AND HUMAN SERVICES

AS RESPONDENT SUPPORTING PETITIONER

CHARLES FRIED-

Solicitor General

RICHARD K. WILLARD

Assistant Attorney General

LAWRENCE G. WALLACE

Deputy Solicitor General

GLEN D. NAGER

Assistant to the Solicitor

General

ROBERT S. GREENSPAN

MARLEIGH D. DOVER

Altorneys

Department of Justice

Washington, D.C. 20530

(202) 633-2217

QUESTION PRESENTED

Whether the Social Security Act requires that lump-sum

personal injury awards be treated as “resources,” rather

than as “income,” for purposes of computing eligibility for

an amount of AFDC benefits.

TABLE OF CONTENTS

Page

EET ORE UT RD Oe ty ee Dee ee |

ae i ee aga l

Statutory and regulatory provisions involved ............... 2

ss wade debecooes 3

I FE Nea eS 8

EE a ee ee 10

The statute does not require the Secretary and the states to

treat lump-sum personal injury awards as “resources,”

rather than as “income,” when computing a family’s

eligibility for and amount of AFDC benefits ........... 10

A. The Secretary’s interpretation of the term “income”

reasonably implements the policies of the proration re-

I A Sa I ee 11

B. The Secretary’s interpretation is entirely consistent

with the language, structure, and legislative history of

PCE GUGEs Wi Wein dd dobdamaeeneddadabodwes « c- 13

C. The court of appeals’ opinion provides no persuasive

reason for overturning the Secretary’s interpretation . 16

i a a 19

ERR Ory Rh, inte cgi Oe eae

TABLE OF AUTHORITIES

Cases:

Aluminum Co. v. Central Lincoin Util. Distr., 467 U.S.

RETR Ps Mice aS a gh a ee See 16

American Paper Institute, Inc. v. American Electric

Power Service Corp., 461 U.S. 402 ................. iJ

Andrus v. Glover Construction Co., 446 U.S. 608 ....... 14

Atkins v. Rivera, No. 85-632 (June 23, 1986) ........... 10

Batterton v. Francis, 432 U.S. 416 .................... * 10

CFTC v. Schor, No. 85-621 (July 7, 1985) .............. 16

Chevron U.S.A. Inc. v. Natural Resources Defense Coun-

PE See 10

Coakley v. Sunn, No. 85-1233 (D. Hawaii Apr. 2, 1986) . . 12

Dandridge v. Williams, 397 U.S. 471 .................. 19

EE 16

Heckler v. Turner, No. 83-1097 (Feb. 27, 1985) ......... 9, 14,

15, 17, 18

(II)

Cases — Continued: Page

Jackson v. Guissinger, 589 F. a 12

Littlefield v. State, Department of Human Services, 480

Ss See 12

Miller v. Youakim, 440 U.S.125..................... 16

NLRB v. Bell Aerospace Co., 416 U.S. 267 ............ 16

Rosado v. Wyman, 397 U.S.397 ................... , 3

Shea v. Vialpando, 416U.S.251............ free |

Sweeney v. Murray, 732 F.2d1022.................... 11-12

Udall v. Tallman, 380U.S.1...................... 10, 12, 16

United States v. Morton, 467 U.S.822.............__. 16, 19

United States v. Riverside Bayview Homes, Inc., No.

rr 10

Walker v. Adams, 741 F.2d116................... 17

Watkins v. Blinzinger, 789 F.2d474.................. i, oS

17, 18, la

Watt v. Alaska, 451U.S.259.................... + 18

Young v. Community Nutrition Institute, No. 85-664

ES SO ee 16

Zenith Radio Corp. v. United States, 437 U.S. 443 16

Statutes and regulations:

Omnibus Budget Reconciliation Act of 1981, Pub. L. No.

a a a 5

Social Security Act, Tit. IV, 42 U.S.C. 601 er seq. 3

EE me 3, 11

§ 402(a), 42 U.S.C. 602(a).......... 3

§ 402(a)(7), 42 U.S.C. 602(aK(7) ...... 13

§ 402(aX7)A), 42 U.S.C. 602(aX7)(A) . 1]

§ 402(aX(7)B), 42 U.S.C. 602(aX(7(B) .... 4

§ 402(aX7(C), 42 U.S.C. 602(aK7VKC) ..._. 4

§ 402(aX(8)(A), 42 U.S.C. 602(aN8MA) ... . 4,13

§ 402(a)(17), 42 U.S.C. 602(a,17) .. .. 2, 4, 5, 11

§ 402(a)(18), 42 U.S.C. 602(a18) .. 4

§ 402(a)(31), 42 U.S.C. 602(aX31) .. 4, 13

7 U.S.C. 2014(d,(8) ...... ie. 18

26 U.S.C. 61 18

26 U.S.C. 104(a) 18

lV

Statutes and regulations — Continued: Page

45 C.F.R::

Section 201.0 ef seq. ...... ive rr 3

Section 233.20(a)(3)i) ......... Seaaeus 4

Section 233.20(aX(3)(iiMF) .......------ alee clin 2, 6

Miscellaneous:

Administration’s Proposed Savings in Social Services Pro-

grams, Hearings Before the House Subcomm. on Public

Assistance and Unemployment Compensation of the

House Comm. on Ways and Means, 97 Cong., |st Sess.

on en cca ebeebed eed ovastwenhoendege oes ; 15

47 Fed. Reg. (1982):

POP rrrrerrrrrr rrr rrr tr Terri t eS 5

“S PAAPMITITITTLIT CO TLTT TTT Li. 5

“S| WTOP rrrerr Terrier tte tet 5

48 Fed. Reg. (1983)

i PE PererT er rrr Tit tir tc 18

EEE ncsccccsennces cennenatswanes 18

49 Fed. Reg. (1984):

sig b65040necéaveunsancesecss pases _— 5

<< foe Seda meks heeen keene vrerer 5-6

51 Fed. Reg. (1986)

i wiadickhtiasscace shmeris whe ses 6

Es vee sta lcegaaiain bia b ackia aia eae aed Sere F

i TD baci devoccdcerevecerectuesesissiieoeess 6

51 Fed. Reg. 9205 (1986) (to be codified ai 45 C.F.R.

SD odo cv edddecctcdndceresnvacvecess 19

Handbook of Public Assistance Administration (Sept.

Pee re or were rr TT eee ay 15

S. Rep. 97-139, 97th Cong., Ist Sess. (1981) . 2 eee 11

Staff of House Committee on Ways and pvane, 97th

Cong., Ist Sess., Description of the Administration's

Legislative Recommendations Under the Jurisdiction

of the Ways and Means Comm. (Comm. Print 1981) .. 14

Staff of Senate Committee on Finance, 97th Cong., Ist

Sess., Proposals for Reductions in Spending Programs

Under the Jurisdiction of the Senate Finance Commit-

tee (Comm. Print 1981) ...... Oe ey atin er Per 14

House Comm. on Ways and Means, 97th Cong., Ist Sess.,

Tax Aspects of the President’s Economic Program

(1981) ins 12

Jn the Supreme Court of the Gnited States

OCTOBER TERM, 1986

No. 85-1358

WILLIAM L. LUKHARD, COMMISSIONER OF THE

VIRGINIA DEPARTMENT OF SOCIAL SERVICES, PETITIONER

Vv.

ONA MAE REED, ET AL.

ON WRIT OF CERTIORARI TO

THE UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

BRIEF FOR THE

SECRETARY OF HEALTH AND'HUMAN SERVICES

AS RESPONDENT SUPPORTING PETITIONER

OPINIONS BELOW

The opinion of the court of appeals (Pet. App. 1-22) is

reported at 774 F.2d 1270. The opinion of the district

court on summary judgment (Pet. App. 23-51) is reported

at 591 F. Supp. 1247. The opinion of the district court on

preliminary injunction is reported at 578 F. Supp. 40.

JURISDICTION

The judgment of the court of appeals was entered on

October 10, 1985. A petition for rehearing was denied on

November 14, 1985 (Pet. App. 55-57). The petition for a

writ of certiorari was filed on February 11, 1986, and was

granted on June 23, 1986. The jurisdiction of this Court is

invoked under 28 U.S.C. 1254(1).

(1)

STATUTORY AND REGULATORY

PROVISIONS INVOLVED

Section 402(a)(17) of the Social Security Act, 42 U.S.C.

602(a)(17), states, in pertinent part:

{A state AFDC plan must] provide that if a person

** * receives in any month an amount of income

which, together with all other income for that month

not excluded under paragraph (8), exceeds the State’s

standard of need applicable to the family of which he

is a member —

(A) such amount of income shall be considered in-

come to such individual in the month received, and

the family of which such person is a member shall be

ineligible for aid under the plan for the whole number

of months that equals (i) the sum of such amount, not

excluded under paragraph (8), divided by (ii) the

standard of need applicable to such family, and

(B) any income remaining (which amount is less

than the applicable monthly standard) shall be treated

as income received in the first month following the

period of ineligibility specified in subparagraph (A).

45 C.F.R. 233.20(a)(3)(ii)(F) provides, in pertinent part:

When the AFDC assistance unit’s income, after ap-

plying applicabie disregards, exceeds the State need

standard for the family because of receipt of

nonrecurring earned or unearned lump sum income

[including for AFDC, title Il and other retroactive

monthly benefits and payments in the nature of a

windfall, e.g., inheritances or lottery winnings, per-

sonal injury and worker compensation awards, to the

extent it is not earmarked and used for the purpose

for which it is paid, i.e., monies for back medical bills

resulting from accidents or injury, funeral and burial

costs, replacement or repair of resources, etc.],

= rs lh a

i er Sar TROD ayn

3

the family will be ineligible for aid for the full number

of months derived by dividing the sum of the lump

sum income and other income by the monthly need

standard for a family of that size. Any income re-

maining from this calculation is income in the first

month following the period of ineligibility.

STATEMENT

The Aid to Families with Dependent Children (AFDC)

part of the Social Security Act (Title IV, Part A of the Act,

42 U.S.C. 601 et seq.) establishes a cooperative federal-

State assistance program. Participating states provide

financial support to needy dependent children and the per-

sons who care for them, and the federal government par-

tially reimburses the states for the expenses they thereby

incur. The AFDC program is designed to “encourag[e] the

care of dependent children in their own homes * * * and to

help [those children’s] parents or relatives to attain or re-

tain capability for the maximum self-support and personal

independence * * *” (42 U.S.C. 601).

States participate in the AFDC program at their option

and, at the present time, all states have chosen to do so.

Accordingly, each state has formulated and administers an

assistance plan that conforms with the requirements of the

statute and the implementing rules and regulations of the

Secretary of Health and Human Services (Secretary). See

42 U.S.C. 602(a); see generally 45 C.F.R. 201.0 er seq. In

conformity with these requirements, each state has

established a statewide standard of need, “which is the

amount deemed necessary by the State to maintain a

hypothetical family at a subsistence level.” Shea v.

Vialpando, 416 U.S. 251, 253 (1974). Furthermore, each

state has specified “how much assistance will be given, that

is, What ‘level of benefits’ will be paid.” Rosado v.

Wyman, 397 U.S. 397, 408 (1970). And, in administering

its assistance plan, each state distinguishes between a

4

family’s “resources” and its “income”: If the family’s

“resources” or “income” in a given month exceeds state-

specified limits (subject to federally prescribed max-

imums), the state cannot provide the family with AFDC

benefits that month. See 42 U.S.C. 602(a)(7)(B),

602(a)(17), 602(a)(18). The maximum figure for

“resources” generally exceeds that for “income.”

The statute requires the states to exempt certain assets

and monetary receipts from these “resources” and “in-

come” calculations. For example, the state must “exclude”

from a family’s countable “resources” the family home, an

automobile (up to $1,500 in value), and, at the state’s op-

tion, certain items deemed essential to daily living. See 42

U.S.C. 602(a)(7)(B)-(C); 45 C.F.R. 233.20(a)(3)(i).

Likewise, the state must “disregard” certain earnings of

AFDC family members and relatives in determining a

family’s countable “income.” See 42 U.S.C. 602(a)(8)(A),

602(a)(31). However, the statute does not otherwise assist

the states in distinguishing between “resources” and “in-

come” for AFDC benefit eligibility determinations.

2. Prior to 1981, the states were required to treat all

“income” or “resources” received in one month as

“resources” in succeeding months—until the money was

spent. This, however, had an anomalous effect on any

family that received a nonrecurring lump sum payment

(e.g., a retroactive social security payment, an inheritance,

a lottery winning, etc.). The family had to spend the lump

sum receipt as quickly as possible or face potential dis-

qualification from AFDC benefits (because their

“resources” might exceed allowable limits). Thus, though

the statute was designed to encourage AFDC families to

budget their money responsibly, its treatment of lump sum

receipts had the opposite effect.

Accordingly, in 1981, the Secretary recommended that

Congress amend the statute’s treatment of lump sum

receipts. See Letter to the Speaker of the House of

5

Representatives (May 5, 1981) and Attached Excerpt of

the Section by Section Summary, Social Welfare Amend-

ments of 1981 (Pet. App. 90-93). Specifically, the

Secretary proposed that the states be required to prorate

that part of a family’s income which exceeds the state’s

monthly standard of need over a period of months — deter-

mined by dividing all lump sum receipts and other count-

able income by the applicable monthly need standard. See

id. at 93. Congress concurred in the Secretary’s suggestion

and, in the Omnibus Budget Reconciliation Act of 1981

(OBRA), Pub. L. No. 97-35, 95 Stat. 845, enacted into law

the Secretary’s proposed proration requirement. See 42

U.S.C. 602(a)(17). The effect of the amendment was.and

still is, with exceptions not relevant here, to render a fami-

ly that receives a substantial lump sum income payment in-

eligible for AFDC benefits for several months, even if the

family dissipates that lump sum before the ineligibility

period has expired.

3. The Secretary subsequently published rules to im-

plement the new statutory proration requirement. See 47

Fed. Reg. 5648, 5675 (1982). In doing so, the Secretary

noted that Congress had not specified that any change be

made in the states’ existing practices in defining “income.”

See id. at 5656. Accordingly, the Secretary observed,

states could and should continue to exclude from

“income” all lump sum monies earmarked and used for a

specific purpose, such as the payment of medical bills. See.

id. at 5656.

Two years later, in another rulemaking proposal, the

Secretary noted that some states were treating other

“payments [that] Congress [had] intended [to] be counted

and used to meet the family’s future needs * * *” as re-

sources, rather than as income. 49 Fed. Reg. 45558, 45561

(1984). The Secretary acknowledged that he had in the

past permitted the states to treat some lump sum receipts

as either “income” or “resources.” See id. at 45561. But he

6

proposed thai, under the 1981 statutory proration require-

ment, all states henceforth treat “all lump sum payments

* * * as income under the AFDC program,” unless “other-

wise disregarded” by the statute or its implementing

regulations. /bid.

The Secretary received numerous comments concerning

this proposal. See 51 Fed. Reg. 9196, 9197 (1986) (sum-

marizing comments). Some commentators reminded the

Secretary that, in enacting the OBRA, Congress had only

“meant to chenge the methodology applicable to lump

sum income[,] * * * not the definition of lump sum in-

come” (id. at 9197). Thus, they argued that non-recurring

lump sum awards, such as workers’ compensation pay-

ments and personal injury settlements, had to be treated as

“resources,” and not as “income,” of the AFDC family.

Ibid. The Secretary responded that “some states have

always considered such payments as income [and thus]

there was no specific definition of lump sum income that

* * * Congress [could have] intended to maintain.” /bid.

Accordingly, he concluded that, “[gliven the Congress’

clear intent to have lump sums * * * used to meet future

needs, States should not be allowed to exclude {lump sum

receipts, such as personal injury and workers’ compensa-

tion awards,] by calling them resources.” Jbid. He then

adopted a rule to that effect. See id. at 9205 (to be codified

at 45 C.F.R. 233.20(a)(3)(iiMF) (reproduced at page 2,

supra).

4. In.1983, well before the Secretary had initiated the

latter rulemaking proceedings, three of the private

respondents filed this class action. 578 F. Supp. 40(W.D.

Va.)Each had received a personal injury or workers’ com-

pensation award and had been held ineligible for AFDC

benefits. Jd. at 41-42. The Commissioner of the Virginia

Department of Social Services (Commissioner) had elected

to treat their personal injury and workers’ compensation

awards as “income” and, applying the new statutory pro-

ration requirement, had determined that their prorated in-

7

comes were above the state’s monthly need standard. /bid.

Respondents objected to the Commissioner’s treatment of

their personal injury and workers’ compensation awards

and asked the district court immediately to restore their

AFDC benefits. bid. The district court granted the three

respondents’ motion for preliminary injunctive relief, but

denied their accompanying request for class-wide

preliminary relief. Jd. at 45.

The district court subsequently certified the requested

class and granted summary judgment in its favor (Pet.

App. 23-51). The court agreed with the respondent class

that, in enacting the proration requirement, Congress had

not directed that all lump sums be treated as “income” (id.

at 45-46). Relying primarily on dictionaries and the Inter-

nal Revenue Code, the court ruled that personal injury

awards do not fit within the ordinary meaning of the term

“income” and therefore are not among those lump sum

receipts to which Congress had intended the proration re-

quirement to apply. /d. at 41-51. Accordingly, the court

held that the Commissioner and the Secretary had erred in

denying benefits to the respondent class.

In October 1985, approximately five months before the

final regulations were issued in the then-pending rulemak-

ing proceedings, the court of appeals affirmed the judg-

ment of the district court (Pet. App. 1-22). The court

agreed with the district court that personal injury awards

are not “income” within the ordinary meaning of that

term. In the court’s view, persons receive “income” only

when they make a “profit or gain,” and persons receiving

personal injury awards make no such profit or gain (id. at

12). The court found nothing in the legislative history of

the 1981 amendment to convince it that Congress had in-

tended to depart from this conception of the term “in-

come” (id. at 14-15). Finally, the court held that the

Secretary’s and the state’s treatment of casualty loss

is

-

a

8

awards as “resources” and their treatment of personal in-

jury and workers’ compensation awards as “income” to be

inequitable and un-easonable (id. at 15-16).

SUMMARY OF ARGUMENT

The court of appeals erred in overturning the Secretary’s

judgment that personal injury and workers’ compensation

awards may (and, indeed, should) be treated as “income”

when computing a family’s eligibility for and amount of

AFDC benefits. The Secretary’s interpretation gives

reasonable content to the term “income” and promotes the

policies underlying the proration requirement enacted by

Congress in 1981. Congress adopted that proration re-

quirement to encourage AFDC families to become self-

sufficient and to reduee-the-costs of the AFDC program.

. Treating personal injury and workers’ compensation

awards as lump sum income subject to proration furthers

these congressional goals. Therefore, in the absence of

clear legislative intent to the contrary, the Secretary can

reasonably require their proration.

Congress has expressed no contrary intent. While the

statute does not define the term “income,” its language in-

dicates that Congress intended the term to reach all

receipts that a family can use to support itself. Similarly,

the statute’s structure indicates that Congress intended to

limit the payments that can be excluded from the benefit

eligibility calculation; Congress specifically identified

which monetary receipts the states must “disregard” in

calculating an AFDC family’s income. Significantly, per-

sonal injury and workers’ compensation awards are not

among them. The Secretary thus acts consistently with the

sense of the statutory scheme in refusing to treat them as

excludable from “income.” The legislative history of the

1981 amendment fully supports this view: in enacting the

proration requirement proposed by the Secretary, Con-

gress did not prescribe any restriction on the lump sum

9

payments that the Secretary can include within the defini-

tion of “income.” Indeed, since the Secretary has tradi-

tionally permitted the states to treat personal injury and

workers’ compensation awards as “income,” Congress

should be considered to have approved that settled prac-

tice in 1981 and thereby to have provided the catalyst for

the Secretary’s determination to require the states

uniformly to treat personal injury and workers’ compensa-

tion awards as “income.” Given the Secretary’s significant

role in the drafting and discussion of the 1981 amendment,

his interpretation of its use of the term “income” is entitled

to particular deference.

The court of appeals’ reasons for not deferring to the

Secretary’s interpretation of the term “income” are un-

founded. The court’s suggestion that personal injury and

workers’ compensation awards are not “income” because

they do not produce “gain or profit” is erroneous: This

Court has clearly indicated that gain or profit is not a sine

qua non of “income” under the AFDC program (and, in-

deed, has contrasted the Act’s use of that term with its use

of the narrower term “earned income” in other

provisions). Heckler v. Turner, No. 83-1097 (Feb. 27,

1985). Similarly, the court of appeals’ reasoning that the

definition of “income” in the Internal Revenue Code is in-

consistent with the Secretary’s definition of “income”

under the AFDC program is both in error and irrelevant:

The Internal Revenue Code broadly defines “income” and

then specifically excludes personal injury and workers’

compensation awards from that broad definition. The

AFDC statute, by contrast, contains no such express ex-

clusion and uses the term “income” for an entirely dif-

ferent purpose than does the Internal Revenue Code.

Finally, the court of appeals’ view that casualty loss and

personal injury awards cannot equitably be treated dif-

ferently is a moot point. The Secretary’s new regulation re-

quires the states to treat casualty loss and personal injury

10

loss awards similarly: Both are now treated as “income”

subject to proration to the extent they are not earmarked

and used for a specific purpose. Accordingly, there is no

basis for sustaining the court of appeals’ judgment barring

the Secretary and the states from treating personal injury

and workers’ compensation awards as _ proratable

“income” under the AFDC program.

ARGUMENT

THE STATUTE DOES NOT REQUIRE THE SECRETARY

AND THE STATES TO TREAT LUMP-SUM PERSONAL IN-

JURY AWARDS AS “RESOURCES,” RATHER THAN AS

“INCOME,” WHEN COMPUTING A FAMILY’S ELIGIBILI-

TY FOR AND AMOUNT OF AFDC BENEFITS

This case is governed by well-settled principles of

statutory construction: A reasonable interpretation of a

statute by the agency that Congress has entrusted to ad-

minister it is entitled to be enforced. See, e.g., Chevron

U.S.A. Inc. v. Natural Resources Defense Council, Inc.,

467 U.S. 837, 842-845 (1984); Americar Paper Institute,

Inc. v. American Electric Power Service Corp., 461 U.S.

402, 423 (1983); Udall v. Tallman, 380 U.S. 1, 16 (1965).

A court is not free to overturn an agency’s interpretation

simply because the court may prefer a different one, or

because reasonable persons may differ as to the statute’s

meaning. Chevron U.S.A. Inc., 467 U.S. at 843 & n.11.

Rather, so long as the agency has reasonably sought to im-

plement the statute in a manner that Congress had not

oroscribed, its interpretation must be upheld. See Akins

v. Rivera, No. 85-632 (June 23, 1986), slip op. 7; United

States v. Riverside Bayview Homes, Inc., No. 84-701

(Dec. 4, 1985), slip op. 9-10, 17; Chevron U.S.A. Inc., 467

U.S. at 843-845 & nn. 11-14; Batterton v. Francis, 432

U.S. 416, 426 (1977). Under that view, the Secretary’s in-

terpretation of the term “income” in the AFDC program

should be sustained.

1]

A. The Secretary’s Interpretation Of The Term “income”

Reasonably Implements The Policies Of The Proration Re-

quirement

THe Social Security Act provides that, in determining a

family’s need under the AFDC program, a state plan shall,

“except as may be otherwise provided in paragraph (8) or

(31) and section 615 of this title, * * * take into considera-

tion any other income and resources” of the specified

members of a family unit (42 U.S.C. 602(a)(7)(A)). In

1981, Congress added the requirement that the states must

prorate the “amount of income which, together with all

other income for that month not [expressly required to be

disregarded by the statute], exceeds the State’s standard of

need * * * *” (42 U.S.C. 602(a)(17)). Since the Secretary’s

treatment of personal injury and workers’ compensation

awards promotes the policies underlying these provisions,

it is a reasonable interpretation of the term “income.”

That a state plan must take account of all species of in-

come of an AFDC family reflects Congress’ long-

considered judgment that AFDC funds should be a source

of last resort for the support of AFDC families. See Shea v

Vialpando, 416 U.S. at 261; see also 42 U.S.C. 601. Thus,

_in 1981, Congress was specifically troubled to learn that

the then “present treatment of [lump sum] payments had]

the perverse effect of encouraging the family to spend such

income as quickly as possible in order to retain AFDC-

eligibility.” S. Rep. 97-139, 97th Cong., Ist Sess. 505

- (1981) (Budget Committee Report). Congress agreed with

the Secretary that treating lump sum payments in this

fashion was adding unnecessarily to the program’s

~ burgeoning cost (see id. at 505, 553) and undermining the

statute’s goal of helping AFDC families “attain or retain

capability for * * * maximum self-support and personal

independence * * *” (42 U.S.C. 601). It therefore enacted

the proration requirement precisely “to promote responsi-

ble budgeting of lump-sum income by all AFDC families

and to reduce AFDC disbursements * * *” (Sweeney v.

‘

‘

7

'

7

:

ie

‘

,

12

Murray, 732 F.2d 1022, 1027 (ist Cir. 1984); see also

House Comm. on Ways and Means, 97th Cong., Ist Sess.,

Tax Aspects of the President’s Economic Program, 265

(1981) (“This proposal will eliminate the disincentive for

recipients to budget lump-sum amounts over a period of

time while encouraging the use of these payments to meet

basic needs”)).

The Secretary’s determination to allow (and now to re-

quire) states to treat personal injury and workers’ compen-

sation awards as “income” is fully consonant with, and in

furtherance of, these long-standing and recently reaf-

firmed congressional goals. Accord, Watkins v. Blin-

zinger, 789 F.2d 474 (7th Cir. 1986); Jackson v. Guiss-

inger, 589 F. Supp. 1288 (W.D. La. 1984); Coakley v.

Sunn, No. 85-1233 (D. Hawaii Apr. 2, 1986). Personal in-

jury and workers’ compensation awards are not among

those receipts that the state can statutorily “exclude” from

an AFDC family’s “resources.” Thus, if personal injury or

workers’ compensation awards are not treated as “income”

as they are received by the family, but nevertheless are

added to the family’s “resources,” the AFDC family would

have the same “perverse” incentive that Congress sought to

eliminate by enacting the proration requirement —i.e., the

incentive quickly to dissipate the resource in order to en-

sure that they can continue to receive AFDC benefits. The

Secretary’s treatment of such awards as “income” subject

to proration removes that incentive (and, not incidentally,

lowers the cost of the AFDC program). See Watkins v.

Blinzinger, 789 F.2d at 479; Littlefield v. State, Depart-

ment of Human Services, 480 A.2d 731 (Me. 1984). Ab-

sent a clear indication of contrary congressional intent,

that is an interpretation the Secretary is entitled to adopt.

See Udall v. Tallman, 380 U.S. at 316.

13

B. The Secretary's Interpretation Is Entirely Consistent With The

Language, Structure, And Legislative History of the Act

Congress has expressed no such contrary intent. The

language, structure, and the legislative history of the

statute fully support the Secretary’s conclusion that per-

sonal injury and workers’ compensation awards can (and

should) be treated as “income” for AFDC purposes.

The Act does not expressly define the term “income” or

exhaustively list categories of monetary receipts that must

be included within it. But the Act does provide that the

states must take into account “any other income and

resources” of the family (42 U.S.C. 602(a)(7) (emphasis

added). That language suggests that Congress intended the

concepts of “income” and “resources” to be given broad

scope. Congress used these terms in the statute to ensure

that only “needy” families would receive AFDC support.

See Shea v. Vialpando, 416 U.S. at 261. Thus, the most

sensible reconciliation of the two terms is the one that best

encourages a family to budget its income and resources to

take care of itself. As noted above, the Secretary’s treat-

ment of personal injury and workers’ compensation

awards gives the statutory language this congressionally

intended effect.

The structure of the statutory scheme reinforces this

view. The Act identifies on its face categories of monetary

receipts that must be excluded from an “income” calcula-

tion. See 42 U.S.C. 602(a)(8)(A) and (31). These exclu-

sions reflect a considered judgment by Congress that cer-

tain kinds of receipts should not be regarded as funds

available to meet a recipient family’s monthly needs.

Rather, Congress has determined that these receipts

should be deemed precommitted to other uses. Significant-

ly, personal injury and workers’ compensation awards are

not among the monetary receipts that Congress has in-

dicated must be excluded. The Secretary, therefore, has

reasonably concluded, in keeping with the statute’s overall

14

benefit eligibility scheme, that such awards, to the extent

that they too are not precomimitted to other uses, should

be deemed available to meet a family’s monthly needs.'

See Heckler v. Turner, No. 83-1097 (Feb. 27, 1985), slip

op. 8-10; see generally Andrus v. Glover Construction

Co., 446 U.S. 608, 616-617 (1980).

The legislative history of the 1981 amendment to the

AFDC program fully supports this view. When the

Secretary proposed the proration requirement to Con-

gress, he indicated that it would “specify that * * * large

payments [such as insurance proceeds or retroactive

benefit payments,] together with other income remaining

after application of the disregards, would be considered as

income in the month of receipt * * *” (Section-by-Section

Summary, Social Welfare Amendments of 1981, attached

to Letter from Secretary Richard S. Schweiker to Speaker

Thomas P. O’Neill, dated May 5, 1981) (Pet. App. 93).

The Senate adopted the Secretary’s language in light of a

staff report explaining that his proposal would “[rjequire

that large payments, together with other income remaining

after the application of disregards, be considered available

to meet ongoing needs in the AFDC program.” Staff of

Senate Committee on Finance, 97th Cong., Ist Sess., Pro-

posals for Reductions in Spending Programs Under the

Jurisdiction of the Senate Finance Committee 33 (Comm.

Print 1981); see also S. Rep. 97-139, supra, at 505. The

House similarly uiiderstood that the Secretary’s proposal

would “[{r]equire States to consider a// lump-sum payments

as income available to meet a family’s needs.” See Staff of

House Committee on Ways and Means, 97th Cong., Ist

Sess., Description of the Administration’s Legislative

Recommendations Under the Jurisdiction of the Ways and

Means Comm. 53 (Comm. Print 1981) (emphasis added).

Thus, as the Seventh Circuit recently noted after

' That is, of course, the effect of the Secretary’s current regulation

(set forth at page 2, supra).

15

thoroughly reviewing this legislative history, Congress did

not “prescribe any restriction” on the lump sum payments

that the Secretary can include within the definition of “in-

come.” Watkins v. Blinzinger, 789 F.2d 474, 480 (1986);

App., infra, 12a.?

To be sure, neither the language of the proration re-

quirement nor its legislative history indicates that Con-

gress intended to change the meaning of “income” in 1981.

But, as the Secretary noted in the rulemaking process, that

is because “there was no specific definition of lump sum

income that * * * Congress [could have] intended to main-

tain” or change. 51 Fed. Reg. 9197 (1986). The Secretary

had previously allowed states to treat various lump sum

payments, including personal injury and workers’ com-

pensation awards, as either “income” or “resources,”?

and, accordingly, the practice among the states was varied

in 1981 (see ibid.). Indeed, this is a principal reason that

the President of the Welfare Recipients League gave for

opposing enactment of the proration requirement. See Ad-

ministration’s Proposed Savings in Social Services Pro-

grams, Hearings Before the House Subcomm. on Public

Assistance and Unemployment Compensation of the

House Comm. on Ways and Means, 97th Cong., Ist Sess.

316 (1981) (complaining that the proration proposal would

require AFDC families to budget personal injury awards).

Accordingly, “[t}here is no reason to suppose that the

Congress that enacted [the proration requirément]

legislated in ignorance of” this practice (Heckler v.

Turner, slip op. 12), and its “failure to change the

* For the Court’s convenience, we have reproduced as an appendix

to this brief the portion of the Seventh Circuit’s recent opinion in

Watkins that deals with the question at issue here.

> See Handbook of Public Assistance Administration, Part IV,

S-3120 (Sept. 1957) (“a settlement of industrial compensation * * *

might represent a [resource]”) (emphasis added); see also Warkins v.

Blinzinger, 789 F.2d at-480-481 & n.7, App., infra, 13a-l4a & n.7.

————————— —————— ———— —

16

scheme under which the [Secretary] operated is * * * ‘per-

Suasive evidence that the interpretation is * * * one [that]

* * * Congress’ ” approved. Young v. Community Nutri-

tion Institute, No. 85-664 (June 17, 1986), slip op. 9

(quoting NLRB v. Bell Aerospace Co., 416 U.S. 267, 275

(1974)); see also CFTC v. Schor, No. 85-621 (July 7,

1985), slip op. 11; Haig v. Agee, 453 U.S. 280, 297-298

(1981); Zenith Radio Corp. v. United States, 437 U.S. 443,

457 (1978).

Indeed, it was Congress’s enactment in 1981 that pro-

vided the catalyst for the Secretary’s recent regulatory ac-

tion. Prior to 1981, the distinction between lump sum “in-

come” and “resources” was relatively insignificant. If not

dissipated in the month of receipt, all lump sum “income”

became “resources” in the following month (and potentially

disqualified a recipient family from receiving AFDC

benefits). But the 1981 amendment made the distinction

one with important consequences and, therefore, for the

first time, provided the Secretary with a substantial need to

establish a uniform definition of “income” for orderly ad-

ministration of the program. Cf. United States v. Morton,

467 U.S. 822, 835-836, n.21 (1984). Accordingly, in 1982

and 1986, when the Secretary undertook to provide the

States with such a definition, he properly placed great em-

phasis on the intent of Congress in enacting the 1981

amendment. Since the Secretary had proposed that amend-

ment and had made his views concerning its purpose well-

known to Congress before it was enacted, his conclusions

concerning its meaning and intended effect are entitled to

particular deference. See Aluminum Co. v. Central Lincoln

Util. Dist., 467 U.S. 380, 390 (1984); Miller v. Youakim,

440 U.S. 125, 144 (1979); Udall v. Tallman, 380 U.S. at 16.

C. The Court of Appeals’ Opinion Provides No Persuasive

Reason For Overturning the Secretary’s Interpretation

The court of appeals offered three principal reasons for

overturning the Secretary’s interpretation of the term “in-

come” in this statute. First, the court stated that personal

17

injury and workers’ compensation awards cannot be in-

come because they produce no “gain or profit” for the re-

cipient. Second, the court indicated that the Secretary’s in-

clusion of such awards in AFDC income cannot be recon-

ciled with their exclusion from “income” in the Internal

Revenue Code. Finally, the court deemed it arbitrary and

capricious for the Secretary to permit the states to treat

casualty loss awards differently than personal injury

awards. None of these reasons constitutes a proper basis

for rejecting the Secretary’s interpretation.

1. This Court has already held that “gain or profit” is

not a sine qua non of “income” under the AFDC program.

In Heckler v. Turner, supra, the Court held that the term

“income” refers to the gross receipts a family has available

for its support. See slip op. 8-10, 16-26. The Court con-

trasted the Act’s use of the term “income” with its use in

other provisions of the term “earned income” (see id. at

8-9), the latter concept being closely analogous to the

“gain or profit” criterion adopted by the court of appeals

here. This Court concluded that “earned income” is a “a

subset of the broader term ‘income’ ” (id. at 9), and that

the broader term “income” refers to the gross receipts a

family has available to meet its monthly needs (see id. at

8-10, 16-26). Personal injury and workers’ compensation

awards are generally available (at least in part) for that

purpose; accordingly, the Secretary has reasonably re-

quired the states to treat those receipts as “income” to the

extent they are not committed to other uses. See Watkins

v. Blinzinger, 789 F.2d at 482-483 (App., infra, 16a-17a);

see also Walker v. Adams, 741 F.2d 116 (6th Cir. 1984)

(receipt of insurance settlement constitutes income).

2. Contrary to the court of appeals’ view, the

Secretary’s interpretation of “income” is supported, rather

than undermined, by the treatment of personal injury and

workers’ compensation awards in the Internal Revenue

Code. There, the term “gross income” means “all income

18

from whatever source derived” (26 U.S.C. 61). Amounts

received as personal injury and workers’ compensation

awards are excluded from this definition only by express

provision. See 26 U.S.C. 104(a). No such exclusion exists ;

in the AFDC provisions. That omission reinforces the

view that Congress did not intend for a comparable excep-

tion to exist in the AFDC program. Moreover, the exclu-

sion of personal injury and workers’ compensation awards

from the definition of “income” in the Internal Revenue

Code simply indicates that Congress did not want to tax

the recipients of such payments; it does not answer the

question whether Congress wanted further to subsidize

those recipients by providing them AFDC benefits as well.

See Watkins v. Blinzinger, 789 F.2d at 477-478 & n.5§

(App., infra, 6a-7a & n.5); see generally Watt v. Alaska,

451 U.S. 259, 266 (1981) (meaning of statutory term must

be considered in context). As explained above, the

Secretary has reasorably concluded that Congress did not

intend to do so.*

3. Finally, the court’s finding that the Secretary has ar-

bitrarily and capriciously allowed the states to treat casual-

ty loss awards differently from personal injury awards is

now a moot point. The Secretary’s rules now clearly re-

quire the states to treat awards for casualty losses and per-

sonal injury and workers’ compensation losses similarly:

* Similarly, the treatment of personal injury and workers’ compen-

sation awards in the Food Stamp Program and various poverty

guidelines that the Secretary has issued supports, rather than under-

mines, the treatment that the Secretary has give:: them in the AFDC

program. In the Food Stamp Program and the poveriy guidelines, “in-

come” is an all-inclusive concept from which personal injury and

workers’ compensation awards are expressly excluded. See 7 U.S.C.

2014(d)(8) (Food Stamp Program); 48 Fed. Reg. 7010, 7010-7011

(1983) (poverty guidelines). The absence of a parallel exclusion in the

AFDC provisions again indicates that no such exception was intended.

In any event, those programs serve their own distinct purposes, and

the meaning of the term “income” is properly determined only in the

particular context of each program. See Heckler v. Turner, slip. op.

8-26; Watt v. Alaska, 451 U.S. 259, 266 & n.9 (1981).

19

Both are “income” subject to proration to the extent they

are not earmarked and used for a specific purpose. See 51

Fed. Reg. 9205 (1986) (to be codified at 45 C.F.R.

233.20(a)(3(ii){F)) (page 2, supra) (any amount that is ear-

marked and used for “back medical bills * * * funeral and

burial costs, replacement or repair of resources” is to be

excluded for purposes of applying the proration rule) (em-

phasis added). See also United States v. Morton, 467 U.S.

at 835-836, n. 21 (agency can by regulation properly

resolve interpretive issues that arise in litigation). In any

event, there is far-reaching legislative discretion to adopt

such classifications in the context of social welfare pro-

grams. See, e.g., Dandridge v. Williams, 397 U.S. 471

(1970).

In sum, there was no proper basis for the court of ap-

peals’ overturning of the Secretary’s considered interpreta-

tion of the Act.

CONCLUSION

The judgment of the court of appeals should be re-

versed.

Respectfully submitted.

CHARLES FRIED

Solicitor General

RICHARD K. WILLARD

Assistant Attorney General

LAWRENCE G. WALLACE

Deputy Solicitor General

GLEN D. NAGER

Assistant to the Solicitor

General

ROBERT S. GREENSPAN

MARLEIGH D. DOVER

Altorneys

AUGUST 1986

APPENDIX

UNITED STATES COURT OF APPEALS,

SEVENTH CIRCUIT.

Nos. 85-2366, 85-2481.

TOMMIE E. WATKINS, ET AL, PLAINTIFFS-APPLELLANTS,

Vv.

DONALD BLINZINGER, ET AL, DEFENDANTS-APPELLEES,

Dorotuy DAVIS, ET AL, PLAINTIFFS-APPELLANTS,

Vv.

GREGORY COLER, ET AL, DEFENDANTS-APPELLEES.

Argued Feb. 21, 1986.

Decided April 18, 1986.

Rehearing and Rehearing En Banc in

No. 2366 Denied May 12, 1986.

Before BAUER, WOOD and EASTERBROOK, Circuit

Judges.

EASTERBROOK, Circuit Judge.

Recipients of Aid to Families with Dependent Children

(AFDC) are dropped from the program if their incomes

exceed the “standard of need” in their states. They also are

dropped if their “resou ces” exceed $1,000. A person who

receives a lump-sum payment wants to have the payment

called a “resource” rather than ”income.”

If the lump sum is a “resource,” the recipient may spend

it as he pleases; once cash on hand and other valuable

assets dwindle to less than $1,000, the person will be

restored to the rolls. If the lump sum is “income,”

(la)

2a

however, it must be budgeted. Under 42 U.S.C.

§ 602(a)(17), the state’s welfare officials divide the lump

sum by the monthly “standard of need.” See also 45

C.F.R. § 233.20(a)(3)(ii). The quotient gives the number

of months the person will be ineligible for aid. For exam-

ple, if a person receives $20,000, and the monthly standard

of need is $500, the state will divide $20,000 by $500, pro-

ducing a quotient of 40. The recipient will be ineligible for

AFDC for 40 months. This method treats the lump sum as

if the amount of the “standard of need” had been received

as monthly income during the months following receipt of

the lump sum.' A recipient who spends a lump sum

classified as “income” and becomes destitute remains in-

eligible for the program nevertheless, while if the lump

sum had been called a “resource” eligibility would have

been restored.

We have consolidated two cases presenting the question

whether lump sums that compensate victims for personal

injuries are “income” or “resources” for purposes of

AFDC. Watkins v. Blinzinger is a challenge to Indiana’s

implementation of the AFDC program, Davis v. Coler a

challenge to Illinois’s. Both states have chosen to treat

lump sum payments attributable to personal injuries as

“income,” an option that the Department of Health and

Human Services contends States possess.? Both cases

' The system gives the recipient the benefit of the interest that may

be earned from the lump sum. If $20,000 is invested at 10% and

drawn down at a level rate over 40 months, it will produce $590 per

month. If a $20,000 fund invested at 10% is tapped for $500 a month,

it will last for almost 49 months. The regulations disregard this com-

plication, as do we.

? The Department has proposed a regulation that would require

States to treat all lump sum payments as “income.” See the proposed

amendment to 45 C.F.R. § 233.20(a,(3)(iv(E), published for com-

ment at 49 Fed.Reg. 45541, 45567-68 (1984). It has not yet adopted

this regulation, however, and its briefs take the position that until it

does, the states may elect to treat lump sum payments as income or

resources at their option.

3a

were filed as class actions on behalf of all AFDC recipients

who have received or will receive lump-sum payments on

account of personal injuries.» Both courts sustained the

states’ positions, concluding that the states and the

Secretary of Health and Human Services have discretion

to treat sucl. payments as either income or resources.

Watkins v. Blinzinger, 610 F.Supp: 1443 (S.D.Ind.1985);

Davis v. Coler, 601 F.Supp. 444 (N.D. Ill.1984). Watkins

also rejected the plaintiffs’ request for a declaratory judg-

ment that until 1983 Indiana had been violating

§ 602(a)(17) by dividing the lump-sum payment by the

portion of the “standard of need” (90%) that the state

customarily paid to AFDC households, rather than by the

“full” standard of need. The district court concluded that

3 Despite Fed.R.Civ.P. 23(c)(1), which requires a decision on the

apnlication for certification of the class “[a}]s soon as practicable after

the commencement of an action brought as a class action”, neither

district court addressed the motion for certification until it had

granted summary judgment to the defendants. Each court then de-

clined to certify the class. The district court in Illinois refused to rule

on the motion for certification, and the district court in Indiana

denied the motion without stating reasons. Neither is an appropriate

procedure. The decision on certification should be mace quickly. Both

sides have an interest in prompt certification. To the ; .tent the district

courts thought certification unnecessary once they had ruled for the

defendants, they were mistaken. Vickers v. Trainor, 546 F.2d 739, 747

(7th Cir. 1976). A deferred ruling converts the class action to an oppor-

tunity for one-way intervention, which Rule 23 is designed to avoid.

Roberts v. American Airlines, Inc., 526 F.2d 757, 762 (7th Cir.1975),

cert. denied, 425 U.S. 951, 96 S.Ct. 1726, 48 L.Ed.2d 195 (1976). The

defendants have an interest in obtaining the preclusive effect of a cer-

tification, which prevents members of the class from bringing the

same suit later on. The plaintiffs, who may appeal the denial of relief,

also have an interest in knowing whether the stakes on appeal include

the interests of the whole class. Nonetheless, the defendants have not

asked us to remand for certification of the classes to obtain a broader

preclusive effect in the event we affirm, so we shall not discuss the

question further.

4a

because Indiana had switched to the use of the “full”

standard of need, the claim was moot. We discuss this in

Part II below.

There has been a good deal of litigation about the treat-

ment of personal injury awards. Reed v. Health and

Human Services, 774 F.2d 1270 (4th Cir.1985), pet. for

cert., 783 F.2d 454 (4th Cir. 1986) [sic], the only appellate

decision on the question, holds that lump sum payments

for personal injuries must be treated as “resources.” The

district courts are divided. Jackson v. Guissinger, 589

F.Supp. 1288 (W.D.La. 1984), and Betson v. Cohen, 578

F.Supp. 154 (E.D.Pa.1983), rev’d on other grounds sub

nom. Barnes v. Cohen, 749 F.2d 1009 (3d Cir.1984), cert.

denied, ___. U.S. ___., 105 S.Ct. 2126, 85 L.Ed.2d 490

(1985), like the two cases we have on appeal, hold that

States may treat personal injury awards as income.

LaMadrid v. Hegstrom, 599 F.Supp. 1450 (D.Ore. 1984);

White v. Rahm, No. C85-007T (W.D.Wa. Apr. 20, 1985);

and Payne v. Toan, 626 F.Supp. 553 (W.D.Mo.1985),

come out the other way. We disagree with these cases and

with Reed:* The language and legislative history of

§ 602(a)(17) allow the states and the Secretary to define

“income,” and therefore Illinois and Indiana were entitled

- to treat compensation for personal injury as “income.”

The statute uses the word “income” but does not define

that word. We must look elsewhere for help. Start with the

obvious. Money paid to compensate people for personal

injuries is income in a fundamental sense. It may be spent.

It is no different from money received as wages, though as

we discuss later it is usually not taxable. Much of the value

* Because this opinion creates a conflict among ihe circuits, it was

circulated to all judges in regular active service. See Circuit Rule 16(e).

No judge requested rehearing en banc concerning the definition of “in-

come” under § 602(a)(17).

Sa

of an award may represent lost wages, past and future.

Whoever computes the award will start with the reduction

in earnings, discount this to present value, and award that

sum to the injured person. O’Shea v. Riverway Towing

Co., 677 F.2d 1194 (7th Cir. 1982). That the injured person

receives his future wages all at once through the award

rather than in weekly installments over the course of a

lifetime does not change the character of the money.

An award may have other sources, too — compensation

for pain and suffering, for mutilation, for property

damage, for emotional injury, for medical expenses. To

_ the extent these reflect loss in future market opportunities,

they are the same as a replacement of future earnings. The

loss of a limb, for example, may reduce potential earnings,

and the award for the loss therefore is a substitute for

these earnings. The other bases of personal injury awards

are less closely tied to the employment market, and plain-

tiffs urge us to treat these sources, indeed the whole

award, as “compensation” rather than “income”—as an -

even trade for the loss of one’s body or an injury to one’s

psyche. What makes one whole is not gain, and without

gain there can be no income.

This is wrong as a statement of legal life. Suppose a per-

son bought a painting for $50,000 in 1970 and sold it for

$100,000 in 1985. During these 15 years the cost of living

rose by more than 100%; the increase in the price of the

painting did not keep pace wiih the reduction in the value

of money. The painting’s owner is poorer with $100,000 in

1985 than he was with a $50,000 painting in 1970. As an

economic matter he has suffered a loss. Yet as a legal mat-

ter he has received $50,000 in “income,” on which he must

pay tax at the capital gains rate. ‘The law looks to the

receipt of money, not to the existence of economic gain.

(We discuss below the extent to which this exchange would

yield a “resource” in the AFDC program.)

6a

The point may be plainer if we consider how anyone

earns wages. To earn money a person must sell a little bit

of himself. He sells time, and with it the right to engage in

leisure; sometimes he sells his health (by working in a place

with contaminants) or his body (by working in a place with

physical risks). In exchange for giving up these things, he

receives a wage. Over the course of a lifetime this will wear

him down. Time and labor wear us all down. Is the wage

“gain,” or is it just “compensation” for the time, the labor,

the risk of injury, that goes with work? The inquiry is

metaphysical, the answer arbitrary. The answer of the tax

system is that the wage is “income;” the answer of the tax

protester is that the depreciation of the person (a wasting

asset) exactly offsets the wage, and so there is no income.

The plaintiffs in this case have taken the tax protesters’

view of income, as only the excess of receipts over the

costs borne to obtain those receipts.

The plaintiffs also say that pain and suffering is dif-

ferent, clearly not a substitute for earnings. Even here,

though, things are not so clear. Football players sacrifice

their bodies (they “play with pain”) to perform their jobs.

They trade pain for income. People sell parts of their

vodies (blood and kidneys) for money. See Susan Rose-

Ackerman, ZJnalienability and the Theory of Property

Rights, 85 Colum.L.Rev. 931, 945-49 (1985) (collecting

sources). What they get in return is “income.” United

States v. Garber, 607 F.2d 92, 102-05 (Sth Cir.1979) (en

banc) (dissenting opinion; the majority reversed a convic-

tion because of improper instructions on wilfulness

without resolving this question). People may participate in

experiments in which they receive electrical shocks for in-

correct answers, or they may take new drugs. Here, too,

they receive income in exchange for the pain or the risk of

ill health.

All of this is not to say that compensation for lost

wages, or for pain, must be deemed “income.” “Income” is

a legal construct rather than an economic truth; there is no

7a

natural meaning of a legal construct. The tax law has

things both ways. It defines almost every receipt of money

as income, see 26 U.S.C. § 61, and then establishes special

exclusions for damages, see 26 U.S.C. § !04. The defini-

tion of income in § 61 includes damages representing in-

come of every kind, see United States v. Safety Car

Heating & Lighting Co., 297 U.S. 88, 93-94, 56 S.Ct. 353,

356, 80 L.Ed. 500 (1936), though it does not cover a

replacement of “capital.” Section 104(a)(2) then allows ex-

clusion of damages received “on account of personal in-

juries or sickness”. Section 104(a)(3) establishes still

another rule for sums received through accident or health

insurance (which may cover the same losses): these pro-

ceeds are excludable to the extent the taxpayer purchased

the insurance with taxable income, but the proceeds are

taxable income if the insurance is “attributable to con-

tributions by the employer which were not includible in the

. gross income of the employee”.* This is not a line based on

logic; it is a practical compromise. So, too, is any other

working definition of “income.” Should “income” be

defined as all receipts, and then reduced by deductions and

exclusions? The Internal Revenue Code takes this posi-

tion; it could equally well have provided that all costs and

expenses must be subtracted from gross receipts to pro-

duce the definition of “income.”

The Secretary of Health and Human Services has

recognized the arbitrary quality of any definition of “in-

come” by allowing states (so far) to treat personal injury

awards as income or not, at their option. This is certainly

permitted by the analogy to the Internal Revenue Code,

which defines “income” as gross receipts rather than net

’ The Fourth Circuit’s decision in Reed rested in part on a conclu-

sion that damages awards are not “income” under § 104. See 774 F.2d

at 1274. This is a misunderstanding of the Code. The awards are in-

come by virtue of § 61 and excluded from taxation, in part, by virtue

of § 104.

8a

gain. See also Heckler v. Turner, az

S.Ct. 1138, 84 L.Ed.2d 138 (1985), which holds that in cal-

culating income under the AFDC program the Secretary

may look to gross receipts, rather than to receipts less the

expenses the recipient incurs in producing the income.

(These costs are handled by a fixed “disregard” rather than

deducting the actual costs of producing the income.)

To the extent the definition of income is a matter of

logic, there is support for either treatment. When there is

support for either treatment, the decision of the Secretary

and the states must prevail. United States v. Riverside

Bayview Homes, Inc., ___. U.S. , 106 S.Ct. 455,

461-62, 465, 88 L.Ed.2d 419 (1985); Chemical Manufac-

turers Ass'n v. Natural Resources Defense Council, Inc.,

wea CS , 105 S.Ct. 1102, 1108, 1112, 84 L.Ed.2d 90

(1985); Chevron U.S.A., Inc. v. Natural Resources

Defense Council, Inc., 467 U.S. 837, 104 S.Ct. 2778,

2782-83, 81 L.Ed.2d 694 (1984); American Paper In-

stitute, Inc. v. American Electric Power Service Corp.,

461 U.S. 402, 423, 103 S.Ct. 1921, 1933, 76 L.Ed.2d 22

(1983) (if the interpretation is “a reasonable interpretation

of the relevant provisions” it must be sustained). The

Secretary has a general power of superintendence, and his

treatment should be accepted unless beyond the pale of

reasonableness. The Secretary’s treatment is especially

useful when, as here, he had a hand in drafting the legisla-

tion (on which more below) and offered a contem-

poraneous construction. See Miller v. Youakim, 440 U.S.

125, 144, 99 S.Ct. 957, 968, 59 L.Ed.2d 194 (1979); Udall

v. Tallman, 380 U.S. 1, 16, 85 S.Ct. 792, 801, 13 L.Ed.2d

616 (1965).

All welfare legislation depends on the interaction of the

definition of income, the guaranteed level of support, and

the rate at which support is withdrawn as income rises.

States largely control the standard of need and the degree

to which more income leads to a reduction in support. See

9a

Heckler v. Turner, supra, 105 S.Ct. at 1142 & n.3. It is not

possible for a court to change one of these variables

without affecting all. Because AFDC is a program of

cooperative federalism, and because states control most of

the important variables, the Secretary’s position that the

states also may include or exclude certain items from the

definition of “income” is entitled to considerable respect.

If the Secretary (or a court) forced a state to exclude an

item from income, it might respond by reducing the

payments to all recipients of AFDC. A court should re-

quire such a revamping of the program only if the legisla-

tion at hand leaves no alternative.

The question, then, is whether Congress left the

Secretary and the states but one option —to treat personal

injury awards as “resources.” The language of the statute

offers no help. The plaintiffs rely on the legislative

history, but this turns out to be no more illuminating.

Section 602(a)(17) was § 2304 of the Omnibus Budget

Reconciliation Act of 1981 (OBRA).© OBRA was a

Christmas-tree bill amending scores of laws in pursuit of

fiscal savings. Until § 602(a)(17) was enacted, a recipient

of a lump sum would become eligible for AFDC again as

soon as he had spent the money. The Secretary drafted

new language, which became § 602(a)(17), and proposed it

to Congress as a method to induce recipients of AFDC to

conserve nonrecurring receipts—and not incidentally to

reduce the cost of the AFDC program. Congress enacted

§ 602(a)(17) exactly as the Secretary proposed it.

6 There have been two amendments since 1981. A change effective

July 18, 1984, inserted “earned or unearned” before “income” to make

it clear that all sources of income must be budgeted. A further change

effective October 1, 1984, established that the statute applies to all

people receiving AFDC benefits and not just those who had other

earned income. See § 2632 of the Deficit Reduction Act of 1984,

Pub.L.98-369. Neither of these changes affects the structure of

§ 602(a)(17), which for purposes of this case we may take as the prod-

uct of OBRA alone.

10a

The Senate Committee on Finance approved the pro-

posal with the remark: “[L]ump-sum payments should be

considered available to meet the ongoing needs of an

AFDC family. The present treatment of such payments

has the perverse effect of encouraging the family to spend

such income as quickly as possible in order to retain

AFDC eligibility. The committee am: 1dment would re-

quire that such income received in a month be considered

available as income in the month that it is received and

also in future months. . . . [A]ny amount of income that

exceeds the initial month’s needs standard would be di-

vided by the monthly needs standard, and the family

would be ineligible for aid for the number of months

resulting from that calculation.” S.Rep. No. 97-139, 97th

Cong., Ist Sess. 505 (1981), U.S. Code Cong. &

Admin.News 1981, pp. 396, 771. In another section of the

report the Committee used “retroactive social security

benefits” (id. at 436, U.S. Code Cong. & Admin.News at

702) as the sole example of the sort of lump-sum payments

that would be considered “income.” A summary by the

staff of the pending proposals states the effect of the

change this way: “Require that large payments, together

with other income remaining after the application of

disregards, be considered available to meet ongoing needs

in the AFDC program. . . .” Committee on Finance, Staff

Report, “Proposals for Reduction in Spending Programs.”

Part I, at 33 (Committee Print 1981). The committee in the

House also endorsed the Secretary’s proposal but did not

discuss the subject separately in its report. A section-by-

section analysis of the Secretary’s proposal appended to

the House report explains that the proposal would

“(rjequire States to consider all lump-sum payments as in-

come available to meet a family’s needs. . . . Any excess

Sum in the month when received would be carried forward

for later use.” Committee on Ways and Means, Staff

Report, “Description of the Administration’s Legislative

Recommendations,” at 53 (Committee Print 1981).

lla

The plaintiffs allow that the states’ definition of “in-

come” is consistent with the purpose of the legislation. The

more receipts are deiined as “income,” the more recipients

of AFDC will be induced to conserve and budget their

funds, and the less the AFDC program will pay out. Yet

the plaintiffs also observe, accurately, that the legislative

history does not define the “income” that is subject to the

budgeting rule of § 602(a){17). The staff summaries in

both House and Senate say that the language applies to all

“large payments” (Senate staff) or “lump-sum payments”

(House staff), which implies that damages awards from

personal injuries must be “income.” But the words of the

staff are not the equivalent of statements in committee

reports, and the implication that all lump-sum payments

are income may be inadvertence rather than considered

conclusion. The subject was simply not under discussion.

The statements of the Secretary are a little more useful,

but also not conclusive. For example, the Secretary’s

message of May 5, 1981, transmitting his proposals to

Speaker O’Neill, contains much language about the

benefits of inducing the budgeting of “large payments,”

but the Secretary did not offer a definition of income. The

Secretary’s summary of the draft bill states in part: “Under

current law, there is no way to assure that large payments,

such as lump-sum payments of insurance proceeds, or

retroactive benefit payments, are considered available to

meet current needs over a period of time, even though the

family eligibility can be curtailed for the month of receipt.

The proposal would specify that these large payments,

together with other income remaining after application of

the disregards, would be considered as income ...”

Transmittal of Secretary Schweiker to Speaker O’Neill at

10-11. The Secretary’s testimony explaining the proposal

offers another illustration but still no definition. The

testimony states: “When a large amount of money is

received as a lump sum —for example, an inheritance — we

12a

will consider it as income available for support not only in

the month it is received but to meet future needs.”

Secretary Schweiker’s prepared statement before the

Senate Committee on Finance, at 18. Again the Secretary

invites us to infer from the examples of insurance pro-

ceeds, retroactive payments of benefits, and inheritances,

that a// large lump sums are “income”; again the plaintiffs

properly respond that the Secretary never said this, and

that each of these three illustrations could be distinguished

froth awards of damages for personal injuries. In-

heritances are “gain” by plaintiffs’ lights; retroactive

payments of, say, workers’ compensation benefits are

wage-substitutes; insurance proceeds could be from kinds

of insurance other than disability.

The inescapable fact is that Congress wanted to compel

recipients of AFDC to budget lump-sum receipts of “in-

come” but did not consider what “income” might be.

Perhaps the Secretary and many Members of Congress

assumed that all lump sums are “income,” but this was not

the subject of debate or decision. The most that can be

said is that Congress did not prescribe any restriction on

the definition. Any definition that includes particular

lump sums within the category “income” is consistent with

the purpose of § 602(a)(17) to reduce the incentive to

spend large receipts quickly. Because the Secretary has the

discretion to define income in any way consistent with the

will of Congress, this is enough support for his position.

The plaintiffs have two final lines of argument. One is

that because Congress did not change the definition of “in-

come” ir. 1981, the Secretary should have stuck with the

approach in force in 1981, which would have classified

personal injury awards as “resources.” The other is that

the Secretary must be consistent in defining resources, and

that because a regulation defines the receipts from the sale

or exchange of a resource as a resource, the Secretary also

l3a

must define personal injury awards—the equivalent of

receipts from the sale or exchange of the AFDC recipient’s

person — as resources.

The Fourth Circuit was persuaded in Reed that

“income” means only net gain, and that because Congress

did not change this meaning in 1981 damages awards can-

not be income. 774 F.2d at 1275. We have discussed above

the reasons why “income” may mean gross receipts as easi-

ly as it means net gain. The Supreme Court in Heckler v.

Turner used gross receipts as the meaning of income for

purposes of AFDC, and there is no reason why damages

on account of personal injury should receive a different

treatment. See also, e.g., Walker v. Adams, 741 F.2d 116

(6th Cir.1984) (treating as “income” for purposes of

AFDC a payment received as an insurance settlement for

the demolition of a car). The plaintiffs reply that the

Secretary himself has treated personal injury awards as

“resources” since 1957, when a “Handbook of Public

Assistance Administration” informed states that they must

treat as “income” any lump sum that represents “ac-

cumulated current income.” This meant, the Handbook

said, that Social Security benefits and workers’ compensa-

tion benefits are “income” even if paid in lump sums. Ac-

cording to the plaintiffs, however, the Handbook told

states to treat as “resources” compensatory payments for

the loss of a hand or foot. This means plaintiffs conclude,

that all recoveries for personal injuries must be

“resources.”

The Handbook is not as clear as the plaintiffs portray it,

however. It says only that payment for the loss of a hand

or foot “might” be a resource.’ The Handbook leaves this

’ Here is the full quotation: “The [state] agency should make certain

that the kind of resources considered ‘lump sum’ payments are in fact

in the nature of a non-recurring sum or a windfall and not a resource

that represents accumulated current income received in a single sum.

For example, the initial [Social Security] payment representing an ac-

cumulation of current monthly benefits would not under Bureau

l4a

decison to the state. Perhaps more interesting, it instructs

States to treat accumulated workers’ compensation

payments—an administrative substitute for awards of

damages—as “income.” So, too, disability payments

under the Social Security system, still another means of

compensation for personal injuries, are unquestionably

“income” for purposes of AFDC. All in all, this Hand-

book supports the Secretary more than it supports the

plaintiffs. The plaintiffs also rely on briefs attempting to

summarize the Secretary’s policy. These are not useful

guides; the Secretary’s handbooks and regulations, not the

efforts of lawyers to summarize them, create the agency’s

policy. Cf. SEC v. Chenery Corp., 318 U.S. 80, 94-95, 63

S.Ct. 454, 462, 87 L.Ed.2d 626 (1943).

The plaintiffs’ final ground, tracking the Fourth Cir-

cuit, is that states must treat like things alike. The

Secretary has promulgated an “equitable treatment”

regulation, 45 C.F.R. § 233.10(a)(1), to this end. Both

Illinois and Indiana treat as a “resource” cash from the

sale or exchange of another “resource.” So, for example, if

a family sells its refrigerator and receives $100, that money

is a “resource.” So, too, if the family’s car is wrecked and

the family receives insurance proceeds, those proceeds are

a “resource.” The Fourth Circuit concluded that the

policy represent a ‘lump sum.’ In like fashion, industrial compensation

payments representing accumulated weekly or monthly amounts

would not be thought of as ‘lump sum’ payments. On the other hand,

a settlement of industrial compensation as the result of loss of hand or

foot might represent a ‘lump sum’ payment.” Handbook of Public

Assistance Administration, Part !1V, S-3120, at 1 (Sept. 7, 1957) (em-

phasis in original). The passage is hard to understand because of

changes in terminology. In 1957 “Lump sum” denoted payments that

were not counted as income. It is also important to understand that

the addressees of this advice were state and local administrators. In

current terminology the Handbook told these administrators that they

must count accumulated income-substitutes as income, but that they

“might” treat compensation for loss of body parts as a resource.

15a

disparity between the treatment of the replacement of

“resources” and the treatment of damages awards — which

it saw as just another receipt for the sale or exchange of an

asset, one’s person —violated the equitable treatment rule

of § 233.10(a)(1). 774 F.2d at 1275.

This reasoning is circular, however. The rule treating as

a “resource” the proceeds of the sale or exchange of a

“resource” treats likes alike. A household that has the $100

rather than the refrigerator is little different from the

household with the refrigerator and no cash. The family

still has less than $1,000 in assets. Because the exchange

does not change the family’s command over real resources,

it does not occasion a change in eligibility for

AFDC — whether or not the family chooses to use the $100

to buy a new refrigerator, or the insurance proceeds to buy

a new car. (If the exchange produced a gain, the family

must “spend down” to $1,000 again.) The question in this

case is whether the receipt of damages for personal injury

is a mere exchange of one asset for another. A person who

has “exchanged” pain and suffering for cash has greater

market opportunities at his disposal; he can use the cash to

improve his position. We assume that the “equitable treat-

ment” regulation does not require wages to be treated as

“resources” on the ground that the worker “exchanges”

sweat and time for money. Because most income is pro-

duced by exchanging something (time, energy, risk of in-

_jury) for money, it is not dispositive that some kinds of ex-

changes (refrigerators for money) are not “income.” The

tax system regularly distinguishes between receipts from

the sale or exchange of property (taxed only to the extent

price exceeds basis, and some like-kind exchanges are not

taxed) and receipts attributable to other sources, such as

labor (people have no “basis” in themselves). We do not

think a state violates the “equitable treatment” regulation

by drawing the same sort of distinction. We have ex-

plained above that the Secretary and the states are entitled

l6a

to treat damages on account of personal injuries as more

similar to wages or other gross receipts than to exchanges.

It follows that the Secretary and the states need not treat

damages awards inthe same way they treat the sale or ex-

change of refrigerators.

Although we have concluded that the Secretary and the

States are authorized to treat the award of damages for

personal injuries as “income,” we do not imply that the ex-

ercise of this authority is always desirable. The AFDC pro-

gram has only two categories, “income” and “resources,”

and two categories are insufficient to exhaust the

variousness of experience. Cf. Stephens v. Heckler, 766

F.2d 284 (7th Cir.1985). Awards for personal injuries will

represent past and future income in part, punitive

damages in part, pain and suffering in part, and medical

expenses in part. An approach that sweeps all into “in-

come” overstates the amount of cash that an award makes

available to the family, just as surely as an approach that

sweeps all into “resources” understates the family’s in-

come. Cf. Schweiker v. Gray Panthers, 453 U.S. 34, 48,

101 S.Ct. 2633, 2642, 69 L.Ed.2d 460 (1981). Suppose a

person receives $20,000, half of which represents iost

future wages and half of which represents the present

value of medicine that the injured person must use for the

rest of his life. Only $10,000 of this award is available to

meet household expenses; the rest must be invested and

spent on medicine many years hence. If the state requires

the family to use the whole $20,000 for subsistence, which

under § 602(a)(17) is the result of calling the whole

$20,000 “income,” there will be nothing left to buy the

medicine. The reply Illinois gave at oral argument —that

the state will furnish the medicine without cost to all re-

cipients of AFDC — assumes that a family Stays on welfare

forever. This is not so, and a state ought not to increace

the likelihood of a family’s needing to stay on welfare by

appropriating to itself the benefits of awards that are

designed to cover medical costs.

17a

So the Secretary’s definition of income may produce

harsh results. It is not an unlawful definition on that ac-

count, however, because the result will be unpleasant no

matter what. Even if the $10,000 for medicine were called

a “resource,” the recipient would be disqualified from the

AFDC program until he had spent all but $1,000 of the

money. So even if the money designated for medicine were

called a “resource,” as plaintiffs wish, the state still would

not allow the recipient to devote the money to its intended

purpose. Too, the statute offers routes to ameliorate the

harshness of calling everything “income.” The AFDC pro-

gram has a separate limit on the kind of “income” that a

recipient must apply toward subsistence. The state must

exclude from income a series of “disregards” (discussed in

Heckler v. Turner, supra) that are proxies for the costs of

generating the income. Perhaps an appropriate

“disregard” could or must be matched against the portion

of an award representing medical expenses. We do not

consider this question here, as the parties have not raised

it. Moreover, § 2632 of the Deficit Reduction Act of 1984

allows states to shorten the period of ineligibility created

by § 602(a)(17) in order to take account of the fact that

lump sum payments may cover fixed expenses and so not

be available to meet the costs of living. See also the interim

implementing regulations, 45 C.F.R. § 233.20(a)(3)(ii)(F),

49 Fed.Reg. 35586, 35591-92 (Sept. 10, 1984). Indiana has

exercised its option under § 2632 and excludes from “in-

come” the portion of an award of damages attributable to

medical expenses. In the hypothetical we have given, In-

diana would treat only $10,000 of the $20,000 award as in-

come.® Illinois represented at oral argument that it has

* The operation of Indiana’s policy is illustrated by the case of

Gaynel Diamond, one of the representative plaintiffs. She received a

payment of $3,302.20 on account of an accident. Of this $1,802.20

was for medical expenses and $1,500 was for pain, suffering,

disfigurement, and permanent impairment. The state applied the

18a

not exercised this option. This may be heartless, but it is

not unlawful. To the contrary, the fact that § 2632 gives

states an option establishes that they may treat as

“income” receipts that they could as readily exclude, and

that they may disqualify families from the program for

lengthy periods when shorter periods would be as satisfac-

tory from Congress’ perspective. Whether to treat medical

expenses as “income” is a question Congress has com-

mitted to the Secretary ana the states.

[This portion of the opinion deals with an Eleventh

Amendment issue. ]

* * * a *

AFFIRMED.

$1,802,20 toward medical expenses, which had been paid by

Medicaid. It treated only the $1,500 as available for living expenses.

This application of the method of § 602(a)(17) produced a dis-

qualification from the AFDC program for five months. (Illinois, too,

excludes past medical expenses; the principal! difference is that Indiana

also would exclude future medical expenses.)

U.S. GOVERNMENT PRINTING OFFICE: 1986— 491-507/20297