Petition for Writ of Certiorari — Brown v. Commissioner

T°eRARY ee

PIIPREME COURT. U. B

IN THE

SUPREME COURT OF THE UNITED STATES.

OCTOBER TERM, 1968.

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WILLIAM A. BROWN, et al.,

Petitioners,

V

COMMISSIONER OF INTERNAL REVENUE,

Respondent.

PETITION FOR A WRIT OF CERTIORARI

To the United States Court of Appeals,

For the Sixth Circuit.

R. MONROE SCHWARTZ,

730 Healey Building,

Atlanta, Georgia,

Counsel for Petitioners.

Sr. Louis Law Printine Co., Inc., 411-15 N. Eighth St., 63101. CEntral 1-4477.

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INDEX.

Page

Opinions below ......... sees eeeeeeeeeeeeeeeeeeeees 2

Jurisdiction ....ccceccccccreccccscvcsecccecvcccees 2

Questions presented ..........++++- ‘etnaneweunyees 2

Statutes involved .........ceeeeceecccceesenceceees 3

Statement of the case .......cceeeeceeeceeeereeeees 3

Reasons for granting the writ ........sseeeeeeeeees a

Comelusion ...cccccccccvesccccsccevcccccccsocesvees 13

Appendix A—Statutes ........seeceeeeeeeeeeeeeeees A-1

Appendix B—Opinion by Tax Court of the U. S., filed

January 18, 1967 .......ceeeeeeeeeeeecceeeeeeees A-3

Appendix C—Decisions by Tax Court of the U. S., en-

tered February 24, 1967 .........seeeeeeeeeeeees A-22

Appendix D—Opinion of Sixth Circuit Court of Ap-

peals, filed July 29, 1968 ..........eeeeeeeeeeeees A-26

Appendix E—Petition for Rehearing, filed August 12,

rrr rr rrr TT rrr Tr TT rel) tire t T A-28

Appendix F—Order denying petition for austin

filed September 12, 1968 ............eeeeeeeeeeees A-33

CITATIONS.

Cases:

McAllister v. United States (1954), $48 U. S. 19, 75

S. Ct. 6, OB Le. Hd. 20 2... cc ccccccsveccccccccees 11

United States v. Kaiser (1960), 363 U. S. 299, 5

2 ef) eee err rer rer ree 8

atime?

PML EAGLE NEL, CERES ROT

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Constitution:

Constitution of the United States, XVI Amendment 3,7

Statutes:

Internal Revenue Code of 1954:

EN Sos ot gnc cevusvaveseas cance: 3, 7,8

PE 6.5 Ki nin evad ao bxeuincxouebivawuce ca: 3, 9

asctsamuinsnes Cascinc ROTC CC ee 11

IN THE

SUPREME COURT OF THE UNITED STATES.

OCTOBER TERM, 1968.

roe

WILLIAM A. BROWN, et al.,

Petitioners,

v

COMMISSIONER: OF INTERNAL REVENUE,

Respondent.

PETITION FOR A WRIT OF CERTIORARI

To the United States Court of Appeals,

For the Sixth Circuit.

William A. Brown, Joseph H. Ferrill and Margaret

Ferrill, Frank H. Abbott and Dorothy G. Abbott, Grady

C. Dixon and Joyce S. Dixon, Alfred C. Brandon Jr., and

Louise M. Brandon pray that a writ of certiorari issue to

review the judgment of the United States Court of Ap-

peals for the Sixth Circuit, entered in the above-entitled

case on July 29, 1968.

=

CITATIONS TO OPINIONS BELOW.

The opinion of the Tax Court of the United States is

reported in 47 T. C. 399, and is printed in Appendix B,

infra, p. A-3. The opinion of the United States Court of

Appeals is reported in 398 F. 2d 832, and is printed in

Appendix D, infra, p. A-26.

JURISDICTION.

The judgment of the Circuit Court of Appeals was en-

tered on July 29, 1968 (p. A-26, infra). A timely petition

for rehearing (Appendix K, p, A-28, infra) filed on August

12, 1968, was denied on September 12, 1968 (Appendix F,

p. A-33, infra). The jurisdiction of this Court is invoked

under 28 U. 8. C., Section 1254 (1).

QUESTIONS PRESENTED.

I. Whether income may be constitutionally taxed where

it stems from financial assistance received by petitioners

from fellow members of an employee association under a

mutual aid agreement and based on a pay-as-you-go policy

so that surplus funds are refunded when the need ceases

and which required petitioners to make similar contribu-

tions to other members involved in another work stoppage

as well as fellow members of the same company as them-

selves.

II. Whether petitioners received non-taxable gifts from

the financial assistance received through an employee §as-

sociation which had a mutual aid, pay-as-you-go policy

and which was received for a period extending for as long

as six months after the termination of a strike.

III. Was the decision of the Tax Court based upon an

erroneous view of the law and clearly erroneous in the

ultimate findings of fact.

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STATUTES INVOLVED.

The statutory provisions involved are: the 16th Amend-

ment to the United States Constitution, sections 61 (a)

and 102 of the Internal Revenue Code of 1954, 26 U.S. C.,

sections 61 and 102. They are printed in Appendix A,

infra, pp. A-1—A-2.

STATEMENT OF THE CASE.

The jurisdiction of the Tax Court was invoked because

the case arises under the Internal Revenue Code. The

Commissioner of Internal Revenue issued statutory notices

of deficiencies to the petitioners herein asserting a tax

due from the inclusion in taxable income of amounts re-

ceived by the petitioners through the Air Line Pilots

Association. By timely petitions filed in the Tax Court,

the petitioners contended that the amounts received did

not constitute taxable income within the meaning of the

XVI Amendment of the United States Constitution, or in

the alternative, that the facts, as hereinafter summarized,

justified a conclusion that the amounts received were gifts

and hence not taxable.

During the year 1960, the male petitioners (hereinafter

referred tc as the petitioners) were employed as airline

pilots by Southern Airways, Inc., a regularly scheduled

commercial airline (hereinafter called ‘‘Southern’’) and

were based in Memphis, Tennessee. The female petitioners

are parties herein only because they filed joint returns

with their husbands.

During the years 1960 and 1961, each of the petitioners,

with the exception of William A. Brown, was an active

member of the Air Line Pilots Association (hereinafter

called ‘‘ALPA’’), a non-profit, employee-representing as-

sociation with its home office located in Chicago, Illinois,

and affiliated with the American Federation of Labor—

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Congress of Industrial Organization. ALPA was the cer-

tified collective bargaining representative for pilots at

Southern.

Under the Constitution and By-Laws of ALPA, dues to

ALPA are paid by active members only. Apprentice mem-

bers of ALPA do not pay dues and do not assume any

financial obligations to ALPA. They are excluded from

rights and privileges of ALPA. They may attend local

council meetings but may not vote.

On June 5, 1960, after a dispute arose between Southern

and ALPA, the petitioners, along with other pilots em-

ployed by Suuthern, went out on strike. The strike con-

tinued until September 21, 1962, and during that time and

until March, 1963, the petitioners received financial assist-

ance through ALPA pursuant to ALPA’s Policy manual.

The amount of assistance received by each petitioner

varied and was based on a formula established by ALPA

policy prior to the strike. Strike assistance was also

received by non-members of ALPA (including petitioner

Brown) in accordance with the existing ALPA policy.

Strike assistance was received regardless of whether the

pilot obtained other type of work or had other financial

resources. Petitioner Brown and other apprentice mem-

bers were not required to become active members of

ALPA in order to receive strike benefit assistance.

The dues paid by the ALPA members were for its

normal operating expenses and did not include any

amount for emergency programs, such as strike benefit

assistance. Neither ALPA nor the local council had

any fund on hand for strike benefit assistance.

Financial assistance for members (or non-members)

who may be involved in a strike is provided through the

levying of special assessments on all the other members

of ALPA in accordance with the established ALPA

pa aon

policy and whenever the need arises and after approval

of the ALPA Board of Directors. Under the Constitu-

tion and By-Laws of ALPA and its Policy Manual, as-

sessments are ‘‘levied for each major benefit program

on a pay-as-you-go basis’’. One of the objects of ALPA

is ‘‘to consider and if desirable establish a mutual aid

plan for members of the Association’’, The amount of

each member’s obligation for a strike assessment is de-

termined by ALPA and is based on a percentage of the

member’s dues so as to equate the assessments to be

received with the benefits to be disbursed.

The funds accumulated for the benefit of the petition-

ers (and other striking Southern pilots) were paid by

ALPA members of other air lines who were not engaged

in any work stoppage. A member of ALPA may volun-

tarily decline te pay any assessment made by ALPA.

In that event, he would forfeit his membership in ALPA,

but such loss of membership would have no effect on his

employment status with his particular air line employer.

In June, 1962, at the biennial meeting, ALPA adopted

a resolution to continue paying strike benefits to the

Southern pilots until two months after they returned to

work and were placed on the payroll.

After the strike terminated on September 21, 1962,

there was a period of two to four months before all

the petitioners herein were able to requalify under Fed-

eral Aviation Agency regulations as pilots and return

to the Southern payroll. As a consequence of the ALPA

resolution (adopted in June, 1962), three petitioners

herein continued to receive assistance from ALPA until

sometime in January, 1962, and the other two petitioners

continued to receive assistance until sometime in March,

1963, although they were placed on the Southern pay-

roll in November, 1962 and January, 1963, respectively.

After each petitioner returned to flight pay status, he

was assessed by ALPA for strike benefits that were cur-

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rently payable to other Southern pilots who had not yet

returned to flight pay status and for the two-month

period thereafter, in accordance with the established

ALPA policy and the special resolution. Upon being

placed on the company payroll, the petitioners were

actually receiving assistance and contributing funds for

strike benefits to fellow pilots simultaneously.

Also, during the strike with Southern, petitioners (with

the exception of William A. Brown) were assessed for

assistance payable to pilots of Northwest Airlines, who

were furloughed during 1960 and 1961 because of a dis-

pute between Northwest Airlines and the International

Association of Machinists. Payment of the assessments

by these petitioners was deferred until they had returned

to flight pay status, in accordance with ALPA policy.

Upon termination of the need for financial assistance,

surplus funds in possession of ALPA from assessments

levied for said program were refunded to contributing

members.

The evidence before the Tax Court showed without

dispute that ALPA did not require members to picket

or perform any ot’ er activity in furtherance of the strike

in order to continue receiving strike benefit assistance.

There were instances of financial assistance being paid

even though petitioners and other striking pilots did not

actively support the strike effort, e. g., during the strike

period: petitioner Brandon was engaged as a flying in-

structor and operating an air charter service, petitioners

Dixon and Ferrill jointly operating a hardware and sport-

ing goods store, petitioner Abbott returned to cclloge,

another striking pilot went on active military duty.

On January 18, 1967, the Tax Court filed its findings

of fact and opinion that the strike benefits constituted

gross income to the petitioners within the meaning of

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the Sixteenth Amendment to the Constitution and section

61 (a) of the Internal Revenue Code of 1954 and are

not excludable from gross income as gifts under section

102 (a) of the Code. On February 24, 1967, the Tax

Court entered its decision that there were deficiencies

in income tax owing by the petitioners and entered

orders to that effect.

On May 22, 1967, petitioners filed their Notice of Ap-

peal and Petition for Review.

On July 29, 1968, the judgment of the Tax Court was

affirmed by the United States Court of Appeals for the

Sixth Circuit. A timely petition for rehearing was denied

on September 12, 1968.

The petitioners pray that this Court grant their peti-

tion for certiorari and upon review that the judgments

and decisions of the lower cour‘s be reversed.

REASON FOR GRANTING THE WRIT.

There are approximately 100 other taxpayers who were

involved in the identical labor dispute and who now

have tax cases pending in the various levels of the In-

ternal Revenue Service awaiting the outcome of this test

case. In addition, there are approximately 1,000 other

taxpayers who, as members of the Air Lines Pilots Asso-

ciation, were involved in later labor disputes and who

are indirectly interested in the outcome of this case since

they are concerned with the same issue.

The petitioners contend that the sums of money they

received through the Air Line Pilots Association (ALPA)

do not constitute taxable income within the meaning of

the Sixteenth Amendment of the United States Constitu-

tion or within tue definition of gross income as stated

in Section 61 (a) of the Internal Revenue Code.

LI LIEN AON

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_

Under Section 61 (a) of the 1954 Internal Revenue

Code, the income tax is imposed on taxable income. Peti-

tioners contend, however, that the receipt of the strike

benefits through ALPA under the circumstances set out

herein are not receipts that may constitutionally be taxed.

There are no coatrolling decisions which may be cited

as authority for deciding the issue involved herein. In

the only case in which this Court considered the question

of the taxability of strike benefits, United States v. Kaiser

(1960), 363 U. S. 299, 5 AFTR 2d 1611, it held that the

strike benefits paid to the taxpayer by the union were

gifts and consequently non-taxable. However, the facts

and circumstances of this case are so unique as to clearly

distinguish it from Kaiser and the few other cases in-

volving this issue.

ALPA’s benefit policy applies to situations where simul-

taneous work stoppages occur on two or more air lines.

ALPA policy is to assess the entire membership, includ-

ing the members of each group engaged in a work stop-

page, for amounts due members of the other group, with

the proviso, that payment of an assessment by members

engaged in a work stoppage may be deferred until after

the member has returned to flight pay status.

It is significant to note that the aforementioned ALPA

policy was given effect in the taxable years involved

herein in two situations. During the period of the

Southern strike, pilots of Northwest Air Lines were fur-

loughed, not from a strike of ALPA pilots, but due to a

labor dispute involving Northwest Air Lines and Inter-

national Association of Machinists. Four of the five

petitioners herein, being members of ALPA, were duly

assessed for benefits due the pilots of Northwest Air

Lines. Petitioner Brown, not being a member of ALPA,

was not assessed. In accordance with ALPA policy, the

payment of the assessments by the four petitioners herein

was deferred until they returned to flight pay status.

_—

In the second instance, the petitioners herein were also

assessed (in accordance with ALPA policy) for contribu-

tions to the financial assistance of other Southern pilots

who had not yet returned to the Southern payroll as well

as for the two months subsequent thereto, as provided

in the special ALPA resolution. As a consequence, the

Southern pilots, including petitioners herein, were as-

sessed for benefits due other Southern pilots who had not

yet returned to work and for the two-month period there-

after, while they simultancously received strike bene-

fit assistance.

Petitioners declare that the unique facts in this case

establish the existence of an association of air line pilots

in which the members are willing to come to the aid of

each other in certain defined situations. The petitioners

contend that the mutual aid policy of their association

is analogous to an unfunded self-insurance program or @

fraternal beneficiary society, and that receipts from fel-

low members of such an czganization and under such

circumstances as exist herein do not constitute taxable

income. —

The petitioners contend, in the alternative, that the

facts of this case are sufficient to conclude that the amount

of financial assistance they received through ALPA were

gifts within the meaning of Section 102 of the Internal

Revenue Code.

There was no existing fund on hand which was pre-

viously accumulated for the purpose of paying strike

benefits. The entire program is conducted on a pay-as-

you-go basis and, when the strike is terminated, surplus

funds are returned to the contributing members.

ALPA did not require petitioners to picket or per-

form any other duties in order to receive strike benefits.

Furthermore, the Policy Manual stated that strike bene-

fits are not subject to setoff against other earnings except

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ones:

from approved activity with an airline. As a conse-

quence, several petitioners were engaged in other busi-

nesses during the period of the strike and they received

the same amount of benefits which ALPA policy pre-

scribed. Other striking »vilots who were ordered to active

duty in the U. S. Navy and Air Force during the period

of the strike and as well as after the strike also received

the same amount of strike benefits which ALPA policy

prescribed.

In June, 1962, prior to the termination of the strike,

ALPA, again by special resolution for the benefit of the

Southern pilots, voted to continue the payment of financial

assistance beyond the date of the conclusion of the strike

for a period of two months after their return to the com-

pany payroll. Accordingly, due to the unique circum-

stances involved herein, some of the pilots, including some

of the petitioners, continued receiving financial assistance

for as long as six months after the strike terminated.

The evidence clearly shows: that the ALPA policy pro-

vided for mutual assistance in the event of simultaneous

work stoppages; that strike benefits were not subject to

set-off against other earnings except for earnings from

approved activity with the affected carrier; that the

strike benefits did not terminate on September 21, 1962,

when the strike was concluded; that the sirike benefits

were received by some of the petitioners up to March,

1963, which was two months after they returned to the

Southern payroll and approximately six months after the

strike terminated.

The strike benefit assistance received by petitioners

herein was not “compensation from refraining from labor”

as suggested by the Tax Court. Such a hypothesis would

indicate that petitioners were willing to forego their reg-

ular compensation for flying planes for Southern (for

which they received up to $1,125 salary per month) in

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order to receive “compensation for refraining from labor”

for which they received a maximum of $650 per month

when tue strike commenced. It is obvious that if a pilot

had preferred to continue flying for Southern, he would

not be eligible (under the ALPA Constitution and Policy

Manual) to receive strike benefits since he was not on

strike. Such strike benefit assistance was not paid in lieu

of wages.

Tax Court decisions are to be reviewed in the same

manner as the decisions of the District Courts in civil

actions tried without a jury. Sec. 7482, Internal Revenue

Code of 1954; Rule 52(a), Federal Rules of Civil Pro-

cedure, 28 U. S. ©. The Tax Court findings of fact are

not binding upon this Court if there is no substantial

evidence to sustain them, if they .are against the clear

weight of the evidence, or if they are induced by an

erroneous view of the law.

In applying this rule in McAllister v. United States

(1954), 348 U. S. 19, 20, 75 S. Ct. 6, 8, 99 L. Ed. 20, the

Supreme Court enunciated the following test:

“A finding is clearly erroneous when ‘although

there is evidence to support it, the reviewing court

on the entire evidence is left with the definite and

firm conviction that a mistake has been committed,’

United States v. Oregon (State) Medical Society, 243

U. 8. 326, 339 (72 S. Ct. 690, 698, 96 L. Ed. 978) ;

United States v. United States Gypsum Co., 333 U. S.

364, 395 (68 S. Ct. 525, 541, 92 L. Ed. 746).”

The Tax Court made inconsistent findings of fact when

it found, on the one hand, that payment of strike benefits

to striking pilots was “contingent upon their refraining

from flying for the airline involved in a strike and upon

their active support of the strike effort through perform-

ance of any duties, including picketing, which may be

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assigned by local leadership”, and, on the other hand, that

“the policy manual of ALPA, as adopted by its governing

bodies, provides for the payment of strike benefit assist-

ance to all pilots . . . who are deprived of their airline

income due to (a) being involved in processing a properly

authorized strike; (b) a furlough or lockout by manage-

ment arising directly from ALPA’s efforts to resolve a

dispute; or (c) the implementation of ALPA policy by a

group of members or by ALPA”.

In the first instance, it appears that the Tax Court based

its finding of the basis for paying strike benefits on infer-

ences stemming from personal statements of witnesses in

a deposition unattendea by opposing counsel. In the second

instance, the Tax Court based its finding of the basis for

paying strike benefits from the exact language of the

ALPA policy manual.

As a further inconsistent finding of the basis for re-

ceiving strike benefit payments from ALPA, the Tax Court

found that ‘‘all of such pilots, including all of the pvtition-

ers were required to withhold their services from, and re-

frain from flying for, Southern during the strike’’. There

is no evidence to support such a conclusion.

Further support for the finding of fact that picketing

and active support of the strike effort were not required

in order to receive strike benefits are: (1) The Tax Court.

found that the chairman did not require the performance

by the striking pilots of any picketing or related duties;

(2) ALPA did not require members to picket or perform

any other activity in furtherance of the strike in order to

continue receiving strike benefit assistance; (3) several

instances of strike benefits being paid to the petitioners

and other striking pilots even though they did not actively

support the strike effort through the performance of any

duties were found by the Tax Court, e. g. petitioner Bran-

don being engaged as a flying instructor and operating an

—13—

air charter service, petitioners Dixon and Ferrill joiatly

operating a hardware and sporting goods store, petitioner

Abbott returning to college and in another instance, a

striking pilot went on active military duty during the

period of the strike.

CONCLUSION.

For the foregoing reasons, your petitioners respectfully

pray that this petition be granted, and that -his Court’s

writ of certiorari issue to the United States Court of Ap-

peals for the Sixth Circuit for the purpose of reviewing

the questions hereinbefore specified, and that upon review,

the judgment and decision of the United States Tax Court

and the United States Court of Appeals for the Sixth Cir-

cuit be reversed, and that your petitioners have such other

and further relief as this Honorable Court may deem just.

Respectfully submitted,

R. MONROE SCHWARTZ,

P. O. Box 1398,

Atlanta 1, Georgia,

Counsel for Petitioners.

Certificate of Service.

It is hereby certified that two copies of this Petition

have been served upon Hon. Erwin N. Griswold, Solicitor

General, United States Department of Justice, and two

copies on Hon. Lester R. Uretz, Chief Counsel of the In-

ternal Revenue Service by first class mail with postage

prepaid.

This 6th day of December, 1968.

R. Monroe Schwartz.

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APPENDIX A.

Statutes Invelved.

United States Constitution:

Amendment XVI,

The Congress shall have power to lay and collect taxes

on incomes, from whatever source derived, without ap-

portionment mong the several States, and without regard

to any census or enumeration.

Internal Revenue Code of 1954:

Sec. 61. Gross Income Defined.

(a) General Definition —Except as otherwise provided

in this subtitle, gross income means all income from

whatever source derived, including (but not limited to)

the following items:

(1) Compensation for services, including fees, com-

missions, and similar items;

(2) Gross income derived from business;

(3) Gains derived from dealings in property;

(4) Interest;

(5) Rents;

(6) Royalties;

(7) Dividends;

(8) Alimony and separate maintenance payments;

(9) Annuities;

(10) Income from life insurance and endowment

contracts;

(11) Pensions;

(12) Income from discharge of indebtedness;

ie eS et i et. a

2 hia

(13) Distributive share of partnership gross in-

come;

(14) Income in respect of a decedent; and

(15) Income from an interest in an estate or trust.

Sec. 102. Gifts and Inheritances.

(a) General Rule—Gross income does not include the

value of property acquired by gift, . . .

28 U. &S. C., Federal Rules of Civil Procedure:

Rule 52. Findings by the Court.

(a) Effect. In all actions tried upon the facts without

a jury or with an advisory jury, the court shall find the

facts specially and state separately its conclusions of law

thereon. . . . Findings of fact shall not be set aside

unless clearly erroneous . . .

Siebel Nahe SSE eT ee ee

Set ADIOS, tee SRLS

—_s an

APPENDIX B.

47 T. C. No. 38.

Tax Court of the United States.

William A, Brown, et al.,) Petitioners v. Commissioner

of Internal Revenue, Respcndent.

Docket Nos. 3947-62, 2050-63, 2562-63

2659-63, 2660-63, 2661-63

Filed January 18, 1967.

The petitioners, six airline pilots for Southern Airways,

Inc., went out on strike against the airline in June 1960,

and during 1960 and 1961 received strike benefit pay-

ments from their union, Air Line Pilots Association. Five

of the petitioners were active members and one was an

apprentice member of the association. The benefits were

paid pursuant to an established schedule or formula,

based upon the pilo‘’s preceding year’s airline income,

and were paid from assessments made by the association

against member pilots of other airlines who were not

engaged in any work stoppage. A minimum requirement

for receipt of the benefits was that the recipient refrain

from flying the planes of the airline. Payment of the

benefits was not conditioned upon the pilot’s need. Held,

that the strike payments constituted gross income within

the meaning of the Sixteenth Amendment to the Constitu-

tion and section 61 (a) of the Internal Revenue Code of

1954, and are not excludable from gross income as gifts

under section 102 (a) of the Code.

1 Cases of the following petitioners are consolidated herewith:

Robert E. Owens, Jr., and Elizabeth D. Owens, Docket No.

2050-63; Joseph H. Ferrill and Margaret Ferrill, Docket No.

2562-63; Frank H. Abbott and Dorothy G. Abbott, Docket No.

2659-63; Grady C. Dixon and Joyee S. Dixon, Docket No.

2660-63; and Alfred C. Brandon, Jr., and Louise M. Brandon,

Docket No. 2661-63.

— )

Held, further, that any underpayment of tax resulting

from failure of the petitioners to report the benefits as

income was not due to negligence or intentional disregard

of rules and regulations within the meaning of section

6653 (a) of the Code, and that the petitioners are there-

fore not liable for additions to tax under that section.

R. Monroe Schwartz, for the petitioners.

Vallie C, Brooks, for the respondent.

Atkins, Judge. The respondent determined deficiencies

in the petitioners’ income taxes as follows:

Addition

to Tax

Docket Taxable Sec. 6653 (a)

Number Petitioner Year Deficiency I.R.C. 1954

3947-62 William A. Brown 1960 ¢$ 558.22

2050-63 Robert E. Owens, Jr.

and Elizabeth D.

Owens 1960 526.01

2562-63 Joseph H. Ferrill

and

Margaret Ferrill 1961 946.76 $47.33

2659-63 Frank H. Abbott

and

Dorothy G. Abbott 1960 998.49 49.93

2660-63 Grady C. Dixon and

Joyce S. Dixon 1960 929.71 26.09

2661-63 Alfred C. Brandon,

Jr. and Louise M. 1960 365.51 18.28

Brandon 1961 1,263.41 63.18

The respondent having conceded error with respect to

one of the issues in Docket No. 2659-63, the only issues

remaining for decision herein are: (1) whether strike

benefit payments received by the petitioners during the

taxable years in issue are includable in their gross in-

—*

come, and (2) whether the petitioners in Docket Nos.

2562-63, 2659-63, 2660-63, and 2661-63 are liable for ad-

ditions to tax for the taxable years in issue on account

of negligence or intentional disregard of rules and regu-

lations.

Findings of Fact.

Some of the facts have been stipulated and the stipu-

lations are incorporated herein by this reference.

All of the petitioners filed their Federal income tax

returns for the taxable years involved herein with the

district director of internal revenue, Nashville, Tennessee.

The female petitioners are parties herein only because

they filed joint returns with their husbands, and the

male petitioners will hereinafter be referred to as the

petitioners.

During the yedrs 1960 and 1961 the petitioners were

employed as airline pilots by Southern Airways, Inc., a

regularly scheduled commercial airline (hereinafter re-

ferred to as Southern) and were based in Memphis, Ten-

nessee.

The certified collective bargaining representative at

Southern is the Air Line Pilots Association (hereinafter

referred to as ALPA). ALPA is a nonprofit, employee-

representing association with its home office located at

Chicago, Illinois, and is affiliated with the American Fed-

eration of Labor-Congress of Industrial Organization.

Some of ALPA’s objectives, as set forth in its constitution,

are to establish and exercise the right of collective bar-

gaining for the purpose of making and maintaining em-

ployment agreements covering rates of pay and working

conditions for its members, and to generaliy safeguard the

rights, individually and collectively, of its members. ALPA

consists of a Pilots Division and a Steward and Steward-

esses Division, each of which divisions is fiscally separate,

ORONO S

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—A6—

self-sustaining, and makes and implements its separate

policies.

The administrative structure of ALPA consists of a

board of directors, an executive committee, an executive

board, master executive councils, local councils, and local

executive councils. The board of diretors is the highest

governing body of ALPA and is vested with the general

management and conduct of its business affairs. It is com-

posed of high officials from all of the local councils. The

executive committee and the executive board are respon-

sible for the implementation of the policies announced by

the directors. A master executive council is formed for

each airline represented by ALPA, and functions as a

coordinating council for the membership of that airline.

Local councils of ALPA are established in various cities

for each airline when a majority of all flight deck operat-

ing crew members employed on such airline in a particu-

lar city are active members of ALPA in good standing.

Each local council has a local executive council which is re-

sponsible for the-proper management of the business of

the local council.

In June 1960 the Southern pilots had two local councils:

Council 112 in Atlanta and Council 74 in Memphis. These

two local councils were controlled by the master executive

council for Southern. During the years 1960 and 1961 each

of the petitioners, with the exception of William A. Brown,

was an active member of the Memphis local council 74 of

ALPA. Brown was an apprentice member of such council.

An active member of ALPA is any pilot who has com-

pleted a required one year probationary period with his

company and is voted into the organization by the active

members of the local council. Such members accept and

agree to abide by the constitution and by-laws of ALPA.

An apprentice member is any pilot who possesses all of

the requirements for active membership with the exception

of having completed the re.. ired probationary period.

SAB Lid Raia 1 OG Tiny

=

Dues are paid by active members only. The amount

thereof is, at the election of the member, either a percent-

age of his annual airline income for the previous year or a

flat rate based on his flight status. Apprentice members do

not pay dues and do not assume any financial obligations

to ALPA. They are excluded from rights and privileges

of the association. They may attend local council meetings,

but may not vote.

The constitution of ALPA provides that any member

may be fined, suspended, or expelled, for, among other

things, disobeying or failing to comply with a decision

of the board of directors, the executive board, the execu-

tive committee, the master executive council, or the local

council, or for refusing or willfully neglecting to pay

dues, assessments, fines or financial obligations to ALPA.

The policy manual of ALPA specifically provides that

any member who participates in strike breaking by ac-

tually flying the planes of an airline involved in a strike

shall be automatically expelled from membership. The

policy manual of ALPA, as adopted by its governing

bodies, provides for the payment of strike benefit as-

sistance to all piJots (when certified by the local executive

council), whether members, nonmembers, or apprentice

members, who are deprived of airline income due to (a)

being involved in processing a properly authorized strike;

(b) a furlough or lock-out by management arising di-

rectly from ALPA’s efforts to resolve a dispute; or (c)

the implementation of ALPA policy by a group of mem-

bers or by ALPA. Payment of strike benefits to striking

pilots is contingent upon their refraining from flying for

the airline involved in a strike and upon their active

support of the strike effort, through performance of any

duties, including picketing, which may be assigned by

local leadership.

Dues paid to ALPA cover its normal operating ex-

penses, but do not include any amount for emergency

Hee See

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programs, such as strike benefit assistance. Financial

assistance for members who may be involved in a prop-

erly authorized strike is provided through the levying

of special assessments on all members of ALPA. A strike

assessment must be approved by the board of directors.

The amount of each member’s obligation for a strike as-

sessment is determined by ALPA and is based on a per-

centage of the member’s dues for the preceding calendar

year. A member of ALPA may decline to pay any as-

sessment made by ALPA at any time, in which event he

would forfeit his membership in ALPA, but such loss

of membership would generally have no effect on his

employment status with his particular airline employer.

Local Council 74 did not maintain any fund for strike

benefit assistance.

In 1960 Southern’s pilots voted to strike the company

following a dispute over work rules and wages, and the

ALPA board of directors voted to pay strike benefits to

them in the event a strike took place. Subsequently, on

June 5, 1960, the petitioners, together with all of the

other airline pilots of Southern, with the possible excep-

tion of one or two pilots holding management positions,

went out on strike against Southern. The strike was au-

thorized by the master executive council of Southern and

approved by ALPA’s president in accordance with the

provisions of the ALPA constitution.

The chairman of the local executive council for Mem-

phis Council 74 certified the petitioners and other South-

ern strikers in the Memphis area for strike benefits in

advance of payment. The chairman dil not require the

performance by the striking pilots of any picketing or

related duties, but all of such pilots, including all of the

petitioners, were required to withhold their services from,

and refrain from flying for, Southern during the strike

in order to receive strike benefit payments from ALPA.

ic

During the first 117 days of the strike, Southern was

completely grounded in Memphis, and did not operate any

flights in and out of Memphis during such period. How-

ever, after such period Southern began to operate flights

in and out of Memphis, and the striking pilots were polled

to determine what each felt he was best qualified to do to

help the strike effort and keep Southern from flying. As

a result of such poll, various pilots did various duties in

aid of the strike effort, including picketing.

In August 1960 ALPA entered into an agreement with

Valparaiso Aero Service, Inc., for the operation of an

airline known as Superior Air Lines, during the strike

to compete with Southern over Southern’s most lucrative

routes in order to take business from Southern and ad-

vance the strike effort. Under the agreement ALPA was

to furnish the personnel, including pilots. Some of the

striking Southern pilots contributed their services to Su-

perior as part of the strike effort, receiving no compensa-

tion other than meals and out-of-pocket expenses. Su-

perior’s operations ceased about November 1962, having

resulted in losses in excess of $100,000 which were sus-

tained by ALTA ovursuant to its guarantee given to

Valparaiso. The strixe benefits paid to the petitioners

herein and to other Southern strikers were not affected by

the fact that they did or did not act as pilots for Superior.

ALPA imposed no requirement that strikers prove

monetary need in order to receive such benefits, nor were

any food vouchers distributed or personal obligations of

strikers. paid by ALPA. The policy manual provided that

strike benefits were not subject to set-off against other

earnings except for earnings from approved activity with

the affected carrier during the shutdown.

During a part of the strike period petitioner Brandon

obtained work as a flying instructor and operated an air

charter service, and petitioners Dixon and Ferrill jointly

Seppe, octet

EWEN NK

a Ne OME LEI LISTE RE PLD FINN

— A-10—

operated a hardware and sporting goods store. 1n accord-

ance with the provisions of the ALPA policy manual the

strike benefits received by them were not reduced on

account thereof. During the course of the strike the peti-

tioner Abbott returned to college, but continued to receive

strike benefits.

At the biennial meeting of the board of directors of

ALPA in June 1962, a resolution was adopted to continue

paying strike benefits to the Southern pilots until two

months after they returned to work and were placed on

Southern’s payroll. The resolution stated, im part, as

follows:

Whereas the Southern strike and its attendant

problems appears to be drawing to a conclusion in a

manner favorable to ALPA and to the Southern pilots,

and

Whereas there still has been no ‘‘back to work’’

contract negotiated, and

Whereas an orderly and smooth return of ALPA

pilots to Southern cockpits may take time and may

not be done ‘‘en masse,’’ and

Whereas the long and orderly strike of the South-

ern pilots has contributed future value to all air line

pilots in all future negotiations,

Therefore Be It Resolved this Board: of Directors

extend its congratulations to these men and to

strengthen their resolve in this matter, and

Be It Further Resolved that in accordance with

present ALPA policy on an individual basis the

Southern MEC be empowered to continue payments

for two months after return to work—return to work

will be the date the pilot is placed on the payroll, and

Be It Further Resolved that the ALPA publicly

extend its heartfelt thanks and respect to these mem-

bers for their strong and firm stand for the beliefs of

ALPA.

—A-11—

The ALPA strike against Souihern was terminated on

September 21, 1962, but due to the length of the strike the

striking pilots were required to requalify as pilots under

Federal Aviation Agency regulations, so that there was a

period of from two to four months following the conclusion

of the strike before the petitioners were able to requalify

as pilots and thereby become eligible to be placed on

flight pay status. Accordingly, as a result of the above

ALPA resolution and the requalification requirements, the

petitioners Abbott, Dixon, and Ferrill continued to receive

strike benefits until January 1963, while the petitioners

Brandon, Brown, and Owens received such benefits until

March 1963.

After each petitioner returned to flight pay status, he,

along with other Southern pilots who were members of

ALPA and who had returned to flight pay status (includ-

ing the petitioner William A. Brown who became an active

member of ALPA at the termination of the strike), was

assessed by ALPA for benefits payable to other Southern

pilots who had not yet returned to flight pay status with

Southern.? The funds from which strike benefits were paid

to the petitioners and other striking Southern pilots con-

sisted of amounts paid by ALPA member pilots of other

airlines who were not engaged in any work stoppage,

pursuant to assessments made against them by ALPA.

Upon termination of the strike at Southern, surplus funds

in possession of ALP« from assessments for strike benefits

in connection with the strike were refunzed to contribut-

ing members. ;

The strike benefit payments made by ALPA to each of

the petitioners were made pursuant to an established

2 During their strike against Southern, the petitioners (with

the exception of William A. Brown) were assessed for benefits

payable to pilots of Northwest Airlines, Inc., who were fur-

loughed by said airline during 1960 and 1961 because of a dis-

pute between Northwest Airlines and the International Asso-

ciation of Machinists, but payment of these assessments was

deferred until the petitioners had returned to flight pay status.

ATM Nak D vay thibhbh Sith BR ne ay a at es ee eer ee oie eon nee Maid hte He wee aauneecmemesemenmmammnat Se

— >) ae

schedule or formula set forth in the ALPA policy manual,

based upon the recipient’s preceding year’s airline income,

with certain maximum and minimum limitations. Under

the provisions in existence at June 5, 1960, the benefits

were payable beginning with the 8th day of the strike.

The following tzbulation shows the annual salaries of

the petitioners from Southern just prior to the strike and

the amounts of strike benefits paid to them in cash by

ALPA during the period June 5, 1960 to December 31,

1960, and during the entire year 1961:

Annual Strike Strike

Salary Benefits Benefits

I rior to Paid in Paid in

Strike 1960 1961

William A. Brown $ 4,800.00 $2,561.33 ......

Robert E. Owens, Jr. 6,600.00 2588.07 ......

Joseph H. Ferrill ORT) | ee $7,511.04

Frank H. Abbott 13,500.00 4,548.42 ......

Grady C. Dixon 13,500.00 ee ~ severe

Alfred C. Brandon, Jr. 11,000.00 2,415.27 5,910.90

Prior to filing their income tax returns for the taxable

year 1960 the striking Southern pilots attempted to obtain

information as to the taxability of the strike benefits. One

of them, C. A. Stukes (not a petitioner herein) who was

by education an attorney, requested the advice of J. R.

Goldthwait, Jr., an Atlanta attorney. On February 16,

1961, Goldthwait sent a letter to Stokes advising him that

in view of certain cited court decisions involving strike

benefits and the action of the Government with regard

thereto, it was his opinion that the striking pilots would

be justified in taking the position that strike benefits are

nontaxable and should not be reported as income. Copies

of such letter were circulated by Stokes to all striking

pilots of Southern.

On November 1, 1961, Maurice B. Wigderson, -n attor-

ney on ALFPA’s legal staff, addressed a letter to V. A.

— » ere a

— A-13 —

Knudegard, the master executive council chairman for

Southern, advising him, in answer to his inquiry, that in

his opinion the strike beuefits received by the Southern

pilots constituted gifts. Such opinion was made available

to all Southern pilots.

The petitioners did not report any of the strike benefits

received from ALPA in 1960 and 1961 on their Federal

income tax returns for such years. In the notices of de-

ficiency, the respondent included the above amounts in

the petitioners’ adjusted gross incomes, with the state-

ment that the strike benefit payments from ALPA are

taxable as ordinary income under section 61 of the Inter-

nal Revenue Code of 1954.

The strixe benefits received by the petitioners in the

taxable years 1960 and 1961 did not constitute gifts.

In the notices of deficiency sent to the petitioners in

Docket Nos. 2562-63, 2659-63, 2660-63, and 2661-63, the re-

spondent determined additions to tax under section

6653 (a) of the Code, on the ground that parts of the

underpayments of tax determined for the taxable years

1960 and 1961 were due to negligence or intentional dis-

regard of rules and regulations.

No part of any underpayment in tax determined by the

respondent in Docket Nos. 2562-63, 2659-63, 2660-63, and

2661-63 was due to negligence or intentional disregard of

rules and regulations.

Opinion.

The petitioners contend that the strike benefit pay-

ments received by them do not constitute income within

the meaning of the Sixteenth Amendment to the United

States Constitution and the definition of gross income

contained in section 61 (a) of the Internal Revenue Code

AST Adah ae de Ba a Aly RT le SOLE Re lO bo A he MBG pce

— A-14—

of 1954.2 Alternatively, they contend that the strike

benefit payments constituted gifts within the meaning

of section 102 of the Code, and are therefore not inelud-

able in gross income.‘

The respondent, on the other hand, maintains that the

strike benefit payments received by the petitioners are

properly includable in gross income under section 61 (a)

of the Code, and that they are not excludable from gross

income as gifts.

The petitioners’ principa! reliance is upon the defini-

tion of income contained in Hisner v. Macomber, 252 U. S.

189, namely, ‘‘the gain derived from capital, from labor,

or from both combined, provided it be understood to in-

clude profit gained through a sale or conversion of capi-

tal assets.’’? It appears to be the petitioners’ contention

that the strike benefits received did not derive from any

of these enumerated sources. They claim that ALPA did

not require them to picket or perform any other duties

in order to receive these strike benefits.

8 The Sixteenth Amendment provides:

The Congress shall have power to lay and collect taxes

on incomes, from whatever source derived, without appor-

tionment among the several States, and without regard to

any census or enumeration.

Section 61 (a) provides in part as follows:

(a) General Definition. ——Except as otherwise provided in

this subtitle, gross income means all income from whatever

source derived, including (but not limited to) the follow-

ing items:

(1) Compensation for services, including fees, com-

missions, and similar items;

(2) Gross income derived from business ;

* * *# #* &© & @

4 Section 102 (a) of the Code provides:

(a) General Rule.—Gross income does not include the

value of property acquired by gift, bequest, devise, or in-

heritance.

— A-15 —

While the chairman of the local executive council testi-

fied that he did not require the performance by the strik-

ing pilots of any picketing or related duties in connection

with this strike, the record establishes that ALPA had

the authority to require the performance of such services

as a condition to the payment of strike benefits, and the

evidence shows that the pilots were polled to determine

what they were best qualified to do to help the strike

effort, as a result of which many of them did picket

and perform other duties, inciuding flying for an airline

set up by ALPA in competition with Southern. It is

also clear from the evidence that a minimum requirement

for receiving the strike benefits was that the pilots re-

frain from flying Southern’s planes. It is well established

that compensation from refraining from labor is taxable

income no less than compensation for services to be per-

formed. Salvage v. Commissioner (C. A. 2), 76 F. 2d 112,

affd. 297 U. S. 106. See also John N. Hagar, 43 T. C.

468.

Furthermore, in Commisioner v. Glenshaw Glass Co.,

348 U. S. 426, the Supreme Court held that Congress, in

providing in section 22 (a) of the Internal Revenue Code

of 1939 that gross income includes “gains or profits and

income derived from any source whatever” intended to

exert the full measure of its power to tax income. The

Court further stated that the definition of gross income

contained in Eisner vr. Macomber, supra, “was not meant

to provide a touchstone to all future gross income ques-

tions.” In the Glenshaw Glass case the Court, in holding

that punitive damages received for fraud and anti-trust

violations constituted gross income, pointed out that

there were “undeniable accessions to wealth, clearly

realized, and over which the taxpayers have complete

dominion.” See also General American Investors Com-

pany, Inc. v. Commissioner, 348 U. S. 434. The petitioners

hersin, by receiving the strike benefits, realized accessions

AIL CL | CGI EEE SS

— A-16 —

to wealth which they were free to use as they saw fit,

and we think there can be no question that such benefits

constituted income within the meaning of the Constitu-

tion, and also within the meaning of section 61 (a)® of the

Code unless, as contended by the petitioners, the benefits

constituted gifts which are specifically excluded from

gross income by the provisions of section 102 (a) of the

Code.

In Commissioner v. Duberstein, 363 U. S. 278, the Su-

preme Court stated that the question of whether an

amount received constitutes a gift within the meaning of

the statute is basically one of fact, stating in part:

The course of decision here makes it plain that the

statute does not use the term “gift” in the common-

law sense, but in a more colloquial sense. This Court

has indicated that a voluntary executed transfer of

his property by one to another, without any con-

sideration or compensation therefor, though a com-

mon-law gift, is not necessarily a “gift” within the

meaning of the statute. For the Court has shown

that the mere absence of a legal or moral obligation

to make such a payment does not establish that it is

a gift. Old Colony Trust Co. v. Commissioner, 279

U. §. 716 (7 AFTR 8875]. And, importantly, if the

payment proceeds primarily from “the constraining

force of any moral or legal duty,” or from “the incen-

tive of anticipated benefit” of an economic nature,

Bogardus v. Commissioner, 302 U. 8. 34, 41 [19 AFTR

1195], it is not a gift. And, conversely, “[w] here the

5 While the language of section 61 (a) of the Internal Rev-

enue Code of 1954 differs slightly from that of section 22 (a) of

the Internal Revenue Code of 1939, Congress made it clear that

such change did not affect the all-inclusive nature of statutory

gross income; that the definition of gross income was based

upon the Sixteenth Amendment to the Constitution; and that

the word “income” was used in its constitutional sense. See H.

Rept. No. 1337, 83d Cong., 2d Sess., p. A. 18.

— A-17 —

payment is in return for services rendered, it is irrele-

vant that the donor derives no economic benefit from

it”. Robertson v. United States, 343 U. S. 711, 714

[41 AFTR 1053]. A gift in the statutory sense, on

the other hand, proceeds from a “detached and dis-

interested generosity,” Commissioner v. LoBue, 351

U. S. 243, 246 [49 AFTR 832]; “out of affection, re-

spect, admiration, charity or like impulses.” Robert-

son v. United States, supra, at 714. And in this

regard, the most critical consideration, as the Court

was agreed in the leading case here, is the transferor’s

“intention.” Bogardus v. Commissioner, 302 U. S. 34,

43 [19 AFTR 1195]. “What controls is the intention

with which payment, however voluntary, has been

made.”

The strike benefits paid by ALPA to the petitioners

herein did not proceed from a detached and disinterested

generosity or out of charity or like impulses, The bene-

fits paid to the individual pilots were not conditioned

upon need, but were paid pursuant to an established

schedule or formula based upon the receipient’s pre-

ceding year’s airline income, Such payments were made

in furtherance of the objectives of ALPA, namely, to

obtain anticipated economic benefits for all its pilot

members. As pointed out hereinabove, there was consid-

eration given by the striking pilots—a minimum require:

ment for receipt of the benefits was that the recipient

refrain from flying Southern’s airplanes. It would also

seem that ALPA had at least a moral obligation to pay

the strike benefits to the petitioners as the result of the

action of its board of directors in voting, prior to the

strike, tc pay such benefits if the strike was carried

out. Under the circumstances, we are constrained to

conclude that the benefits in question are not excludable

from gross income as gifts. We note that in Godwin v.

United States (W. D. Tenn.), ... F. Supp. ..., the court

Fe OS eT RTT IPE CS

—

directed a verdict that strike benefits received from ALPA

by a Southern pilot in connection with this same strike

were income rather than gifts. See also Woody v. United

States (C. A. 9), ... F. 2d ..., affirming (D. C., Ore.) ...

F. Supp. ...; John N. Hagar, supra; and Halsor v. Leth-

ert (D. C., Minn.), 240 F. Supp. 738, in which it was held

that under the circumstances there involved strike bene-

fits constituted taxable income.

In United States v. Kaiser, 363 U. S. 299, the Supreme

Court held that a jury had acted within its competence

in finding that certain payments made by a labor union

to a striker constituted gifts. The Court again empha-

sized the basically factual nature of the question. There

the taxpayer went out on strike and found himself in

financial need. He was not a union member but went

to the union headquarters and requested assistance. It

was the policy of the union to grant assistance to the

strikers simply on a need basis, whether or not the striker

was a union member, and to cease giving assistance to

strikers who obtained work. The union representatives

questioned the taxpayer as to his financial resources and

his dependents. The taxpayer had no other job and

needed assistance with respect to the essentials of life.

The union provided him with a food voucher for $6 per

week (later increased to $7.50 per week), redeemable in

kind at a local store, and also paid his room rent amount-

ing to $9 per week. The Supreme Court there stated

in part:

Our opinion in Duberstein stresses the basically

factual nature of the inquiry as to this issue. The

factual inferences to be drawn from the basic facts

were here for the jury. They had the power to con-

clude, on the record, taking into account such factors

as the form and amount of the assistance and the

conditions of personal need, of lack of other sources

of income, compensation, or public assistance, and

—- A-19 —

of Gependency status, which surrounded the program

under which it was rendered, that while the assistance

was furnished only to strikers, it was not a re-

compense for striking. They could have concluded

that the very general language of the Union’s con-

stitution, when considered with the nature of the

Union as an entity and with the factors to which

we have just referred, did not indicate that basically

the assistance proceeded from any constraint of

moral or legal obligation, of a nature that would pre-

clude it from being a gift. And on all these cir-

cumstances, the jury could have concluded that

assistance, rendered as it was to a class of persons

in the community in economic need, proceeded pri-

marily from generosity or charity, rather than from

the incentive of anticipated economic benefit. * * *

Suffice it to state that the situation in the instant case

is significantly different from that obtaining in the Kaiser

case. There the assistance was given because of the re-

cipient’s needs and was earmarked for the payment of

his essentials of life, namely, food and rent. Here the

payments were made irrespective of need and irrespective

of other sources of income, and without any restrictions

as to use.

The respondent also contends that the petitioners in

Docket Nos. 2562-63, 2659-63, 2660-63, and 2661-63 are

liable for additions to tax for the taxable years in issue

under section 6653 (a) of the Code,* on account of neg-

6 Section 6653 (a) provides:

Negligence or Intentional Disregard of Rules and Regu-

lations With Respect to Income or Gift Taxes—If any

part of any underpayment (as defined in subsection (¢) (1))

of any tax imposed by subtitle A or by chapter 12 of sub-

title B (relating to income taxes and gift taxes) is due

to negligence or intentional disregard of rules and regula-

tions (but without intent to defraud), there shall be added

to the tax an amount equal to 5 percent of the under-

payment.

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— A-20 —

ligence or intentional disregard of rules and regulations

in failing to report strike benefits received as income.

Prior to filing their returns for the taxable years 1960

and 1961, the striking Southern pilots attempted to ob-

tain information as to the taxability of the strike benefits.

As the result of the solicitation of one of their members

they, including the petitioners, were in receipt of a letter

from an attorney in which he expressed the opinion that,

in view of certain court decisions involving strike bene-

fits and the action of the Government with regard thereto,

they would be justified in taking the position that strike

benefits are nontaxable and need not be reported as in-

come. The opinion letter itself would indicate to the

reader that the attorney rendering the opinion was famil-

iar with the factual situation involved and with the then

existing cases dealing with the taxability of strike bene-

fits. While, as indicated hereinabove, we are in disagree-

ment with the legal opinion upon which the petitioners

relied, we cannot conclude that their reliance thereon was

unreasonable. Under the circumstances, it is our conclu-

sion that any underpayment of tax due to failure to report

the strike benefits as taxable income was not due to neg-

ligence or intentional disregard of rules and regulations,

within the intendment of section 6653 (a). We accordingly

hold that the petitioners are not liable for additions to tax

under such section.®

7 On brief the respondent states that his failure to deter-

mine section 6653 (a) additions to tax against the petitioners

in Docket Nos. 3947-62 and 2050-63 was due to an oversight.

The respondent chose not to raise this issue affirmatively at the

trial with respect to the above two docket numbers.

8 We note that in Godwin v. United States, supra, an addition

to tax under section 6653 (a) was approved upon the finding

of the jury that the taxpayer was negligent in failing to in-

clude the strike benefits on his income tax return. However,

upon the basis of the evidence presented in the instant case,

we are satisfied that the underpayments resulting from failure

to include the strike benefits as income were not due to negli-

gence or intentional disregard of rules and regulations.

Jt eee tne el Saal

— A-21 —

Decisions will be entered for the Respondent in

Docket Nos. 3947-62 and 2050-63.

Decisions will be entered for the Respondent in

Docket Nos. 2562-63, 2660-63, and 2661-63, except to

the extent he determined additivns to the tax under

section 6653 (a).

Decision will be entered under Rule 50 in Docket

No. 2659-63.

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— A-22 —

APPENDIX C.

William A. Brown, .

Petitioner,

se | Docket 3947-62.

Commissioner of Internal Revenue,

Respondent. |

Decision.

Pursuant to the Findings of Fact and Opinion of the

Court filed January 18, 1967, it is

Ordered and Decided: That there is a deficiency in in-

come tax for the taxable year 1960 in the amount of

$558.22.

/s/ Craig S. Atkins,

Judge.

Entered: Feb. 24, 1967.

Joseph H. Ferrill and Margaret .

Ferrill,

Petitioners,

Vv. . Docket 2562-63.

Commissioner of Internal Revenue,

Respondent. |

Decision.

Pursuant to the Findings of Fact and Opinion of the

Court filed January 18, 1967, it is

Ordered and Decided: That there is a deficiency in in-

come tax for the taxable year 1961 in the amount of

(Na Sn TS RR

— A-23 —

$946.76, and that there is no addition to tax due for the

taxable year 1961, under section 6653 (a) of the Internal

Revenue Code of 1954.

/s/ Craig S. Atkins,

Judge.

Entered: Feb. 24, 1967.

Frank H. Abbott and Dorothy G. .

Abbott,

Petitioners,

Vv. - Docket 2659-63.

Commissioner of Internal Revenue,

Respondent. J

Decision.

Pursuant to the Opinion of the Court filed J anuary 18,

1967, and the agreed computation of the tax liability filed

by the parties, it is

Ordered ard Decided: That there is a deficiency in in-

come tax due from the petitioners for the taxable year

1960 in the amount of $984.21; and

That there is no addition to the tax due from the peti-

tioners for the taxable year 1960, under the provisions

of section 6653 (a) of the Internal Revenue Code of 1954.

/s/ Craig S. Atkins,

' Judge.

Entered: Feb. 21, 1967.

— a

Grady ©. Dixon and Joyce S. Dixon,

Peliticners, |

8 | Docket 2660-63.

Commissioner of Internal Revenue,

Respondent. |

Decision.

Pursvant to the Findings of Fact and Opinion of the

Court filed January 18, 1967, it is

Ordered and Decided: That there is a deficiency in in-

come tax for the taxable year 1960 in the amount of

$929.71, and that there is no addition to tax due for the

taxable year 1960, under section 6653 (a) of the Internal

Revenue Code of 1954.

/s/ Craig S. Atkins,

Judge.

Entered: Feb. 24, 1967.

Alfred C. Brandon, Jr., and Louise

M. Brardon,

Petitioners,

Vv. Docket 2661-63.

Commissioner of In.-rnal Revenue,

Respondent.

Decision.

Pursuant to the Findings of Fact and Opinion of the

Court filed January 18, 1967, it is

Ordered and Decided: That there are deficiencies in in-

come tax for the taxable years 1960 and 1961 in the

CD Rts Other a Seles SACRE EN AB Feta Sil SI wases

—

amounts of $265.51 and $1,263.41, respectively, and that

there are no additions to tax due for the taxable years

1960 and 1961, under section 6653 (a) of the Internal

Revenue Code of 1954.

/s/ Craig S. Atkins,

Judge.

Entered: Feb. 24, 1967.

—S

APPENDIX D.

No. 18013.

United States Court of Appeals

For the Sixth Circuit.

William A. Brown, Joseph H. Fer-

rill, Margaret Ferrill, Frank H.

Abbott, Dorothy Abbott, Grady

C. Dixon, Joyce 8. Dixon, Alfred | patition for Revi

C. Brandon, Jr., and Louise M. a ee op

Brandon, = r §6the Tax Court of

Petitioners-Appellants, the United States

v.

Commissioner of Internal Revenue,

Respondent-Appellee. |

Decided July 29, 1968.

Before O’Sullivan, Phillips and Peck, Circuit Judges.

Per Curiam. This case involves deficiencies in income

taxes determined against the taxpayers for the years 1960

and 1961.

The taxpayers, airline pilots of Southern Airways, Inc.,

went on strike in June 1960 and during 1960 and 1961

received strike benefit payments from their union, Air

Line Pilots Association. The Commissioner determined

that the amounts of strike benefits received by the tax-

payers were includable in gross income.

In an opinion published at 47 T. C. 399, the Tax Court

held that the strike payments constitute gross income

Soncivaten~ S

— A-27 —

within the meaning of the Sixteenth Amendment and Sec-

tion 61 (a) of the Internal Revenue Code and are not

excludable from gross income as gifts under Section 102

(a) of the Code. The Tax Court found that the strike

benefits were paid pursuant to an established formula,

based upon each pilot’s airline income for the preceeding

year, and were paid from assessments made by the asso-

ciation against member pilots who were not engaged in

any work stoppage. A minimum requirement for the re-

ceipt of benefits was that the recipient refrain from flying

the planes of the airline. The Tax Court further found

that payment of benefits was not conditioned upon the

needs of the pilot.

We hold that the findings of fact of the Tax Court are

not clearly erroneous, but to the contrary are supported

by substantial evidence.

The decision of the Tax Court is affirmed for the reasons

set forth in the reported opinion of that Court.

— A-28 —

APPENDIX E.

PETITION FOR REHEARING.

The petitioners respectfully petition this Court to grant

a rehearing with respect to its decision of July 29, 1968,

affirming the decision of the Tax Court of the United

States that held that the receipt of strike benefits con-

stituted gross income within the meaning of the Sixteenth

Amendment of the United States Constitution and section

61 (a) of the Internal Revenue Code and are not ex-

cludable from gross income as gifts under section 102 (a)

of the Code.

The petitioners respectfully submit that the Court ap-

pears to have overlooked or misapprehended the following

significant and uncontroverted facts which strongly and

clearly justify the conclusion that such receipts are not

income within the meaning of the Sixteenth Amendment

and are excludable as gifts under section 102 (a) of the

Code.

1. The dues paid by the members of ALPA (Air Line

- Pilots Association) were for its normal operating expenses

and did not include any amount for emergency programs,

such as strike benefit assistance (40a, 41a).*

9. ALPA had no fund on hand prior to the time strike

benefits were paid (25a).

3. The local council maintained no fund for strike ben-

efit assistance (27a, 41a).

4. Financial assistance for members (or non-members)

who may be involved in a strike is provided through the

levying of special assessments on all the other members

* References are to pages in petitioner’s brief and appendix.

Gr RBA RAL EE ccc tat KONE LOE,

— A-29 —

of ALPA in accordance with the established ALPA policy

and whenever the need arises (10a, 14a, 15a, 23a, 24a, 41a)

and after approval of the ALPA Board of Directors (23a,

24a, 41a).

5. Under the Constitution and By-Laws of ALPA and

its Policy Manual, assessments are ‘‘levied for each major

benefit program on a pay-as-you-go basis’’ (14a).

6. One of the objects of ALPA is ‘‘to consider and if

desirable establish a mutual aid plan for members of the

Association’’ (10a).

7. The amount of each member’s obligation for a strike

assessmeat is determined by ALPA and is based on a per-

centage of the member’s dues (10a, 23a, 41a) se as to

equate the assessments to be received with the benefits to

be disbursed (19a, 34a).

8. Upon termination of the need for strike benefits, sur-

plus funds in possession of ALPA from assessments levied

for strike benefits were refunded to contributing members

(44a, 45a).

9. During the period of the strike, some of the pilots

(including pe'\‘ioners) engaged in various types of work,

operated businesses, or returned to college without any

diminution of strike benefits from ALPA in accordance

with ALPA policy (14a, 34a, 42a, 43a).

10. Also, during the strike with Southern, petitioners

(with the exception of William A. Brown) were assessed

for beneftts payable to pilots of Northwest Airlines, who

were furloughed during 1960 and 1961 because of a dispute

between Northwest Airlines and the International Asso-

ciation of Machinists (44a).

11. Payment of the assessments by these petitioners was

deferred until they had returned to flight pay status, in

accordance with ALPA policy (15a, 44a).

ELLIS OL TRS ENS RU

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Wr SESE AI

PST Ie SAI TI INTL TRON HE BOTS OO

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— A-30—

12. There were instances of strike benefits being paid

even though petitioners and other striking pilots did not

actively support the strike effort, e. g., petitioner Brandon

was engaged as a flying instructor and operating an air

charter service (Stip. par. 33), petitioners Dixon and

Ferrill jointly operating a hardware and sporting goods

store (43a), petitioner Abbott returned to college (32a,

43a), another striking pilot went on active military duty

during the strike (34a).

13. The evidence before the Tax Court (as reflected in

paragraphs 9 and 12, supra) showed, without dispute,

that ALPA did not require members te picket or per-

form any other activity in furtherance of the strike in

order to continue receiving strike benefit assistance (20a,

28a).

14. In June, 1962, at the biennial meeting, ALPA

adopted a resolution to continue paying strike benefits to

the Southern pilots until two months after they returned

to work and were placed on the payroll (15a, 16a, 43a).

15. After the strike terminated on September 21, 1952,

there was a period of two to four months before all the

petitioners herein were able to requalify as pilots and

return to the Southern payroll (29a, 44a).

16. As a consequence of the ALPA resolution (adopted

in June, 1962), three petitioners herein continued to re-

ceive strike benefits from ALPA until sometime in Janu-

ary, 1963, and the other two petitioners continued to

receive strike benefits until sometime in March, 1963, al-

though they were placed on the Southern payroll in No-

vember, 1962 and January, 1963, respectively (34a, 35a,

44a).

17. After each petitioner returned to flight pay status,

he was assessed by ALPA for strike benefits that were

currently payable to other Southern pilots who had not

yet returned to flight pay status and for the two-month

LOST seta 9 ESD RES EAL PN 8 NB A Met

— A-31—

period thereafter, in accordance with the established

ALPA policy and the special resolution (29a, 30a, 35a).

18. Upon being placed on the company payroll, the

petitioners were actually receiving strike benefits and

contributing funds for strike benefits io fellow pilots

simultaneously (30a).

The petitioners urge that full consideration of the

facts in this case clearly indicate that there are no legal

precedents on the determination of the issue before the

Court, i. e., subjecting the type of receipts involved herein

to the income tax.

It was not the intent of the 16th Amendment to

authorize the Federal Government to lay an income tax

upon everything of value that came into the ownership

of the potential taxpayer. The common understanding

of the word ‘‘income’’ is the amount which one has

gained by his transaction or activity. His gains, not his

gross receipts, are his constitutionally taxable income.

Cf. Pedone v. United States (Ct. Cl. 1957), 151 F. Supp.

288, 51 AFTR 645.

The petitioners respectfully submit that this Court’s

affirming the Tax Court’s finding that: ‘‘A minimum re-

quirement for the receipt of benefits was that the re-

cipient refrain from flying the planes of the airline’’, is

without basis in fact and contrary to the evidence.

The finding of the Tax Court to the effect that ‘ali of

such pilots, including all of the petitioners, were required

to withhold their services from, and refrain from flying

for, Southern during the strike in order to receive strike

benefits from ALPA”?’ is erroneous and inconsistent with

the correct basis for paying strike benefits, which does

not contain such conditions (12a, 13a, 14a) and which

basis the Tax Court also found (40a, 42a, 43a).

The Tax Court’s adoption of the erroneous and in-

consistent finding is predicated on an erroneous assump-

ALOR STRATA T IRR SAE ST i Se a

_s

tion that strike benefits are payable (a) in lieu of wages

lost due to the strike, or (b) as compensation for refrain-

ing from work. Such a finding by the Tax Court is

clearly erroneous since it is not supported by substan-

tial evidence and is incongruous since the inference im-

plies that the petitioners would prefer remaining on

strike in order to receive strike benefits which are only

a fraction of their regular wages.

It is inescapable, as disclosed by the uncontroverted

facts in this case that the so-called ‘‘strike benefits’’ do

not originate with ALPA but come from fellow-members;

that said fellow-members are similarly assisted should

the occasion present itself (which experience did occur,

paragrapb 10, supra); and that the petitioners were re-

ceiving strike benefits and contributing funds for fellow-

members for the same purpose simultaneously. Further-

more, the facts also reveal the receipt of such benefits

from fellow-members for a period of approximately six

months after the strike terminated and four months after

they returned to work.

The procedures and policies of ALPA provide sub-

stantial evidence and conclusive proof that these re-

ceipts do not constitute taxable income within the mean-

ing of the Sixteenth Amendment or that a gift was

intended and that such receipts are excludable from gross

income under section 102 (a) of the Internal Revenue

Code.

Conclusion.

For the foregoing reasons, we respectfully submit that

this petition for rehearing should be granted.

This 9th day of August, 1968.

R. Monroe Schwartz,

Counsel for Petitioners.

eelua SOR ak Reb

— A-33 —

APPENDIX F.

No. 18,013.

United States Court of Appeals

For the Sixth Circuit.

William A. Brown, et al.,

Petitioners-Appellants,

Sy

™ > Order.

Commissioner of Internal Revenue,

Respondent-Appellee. ;

Before O’Sullivan, Phillips and Peck, Circuit Judges.

Upon consideration, it is ordered that the petition for

rehearing be and hereby is denied.

Entered by order of the Court.

Carl W. Reuss,

Clerk.