Kuhn v. United States, Civ. A. 549-56.

• Decision Date: 03 January 1958
• Docket Number: Civ. A. 549-56.
• Citation: Kuhn v. United States, 157 F.Supp. 331 (D. N.J. 1958)
• Parties: Otto E. KUHN and Edna R. Kuhn, Plaintiffs, v. UNITED STATES of America, Defendant.
• Writing for the Court: Frankel & Frankel, by Leopold Frankel, Paterson, N. J., for plaintiffs
• Court: U.S. District Court — District of New Jersey

157 F. Supp. 331

Otto E. KUHN and Edna R. Kuhn, Plaintiffs, v. UNITED STATES of America, Defendant.

Civ. A. 549-56.

United States District Court D. New Jersey.

January 3, 1958.

Frankel & Frankel, by Leopold Frankel, Paterson, N. J., for plaintiffs.

Chester A. Weidenburner, U. S. Atty, Newark, N. J., by George J. Rossi, Asst. U. S. Atty., Newark, N. J., and George Elias, Jr., Washington, D. C., for the Government.

WORTENDYKE, District Judge.

Suing under 28 U.S.C. § 1346(a) (1), plaintiffs (husband and wife) seek to recover $7,903.86, the amount of income tax paid, for the year 1953, by the husband (herein called Kuhn) assessed on $12,250, received during the year by him under a written contract, dated May 31, 1951, with Botany Mills, Inc., a New Jersey corporation, (herein called Botany). He contends that the amount so received should not have been included in his "gross income" for the tax year, but should have been excluded therefrom because constituting an amount "received through * * * health insurance * * *," as contemplated by 26 U.S.C. § 22(b) (5). As a second cause of action, Kuhn claims the right to a refund of $1,057.36, less $350 already received, representing portion of income tax paid in 1953 but assessed for 1952, on the sum of $2,083.34 evidenced by check of Botany as salary to Kuhn, dated December 31, 1952. The proceeds of this check were not actually received by Kuhn until January 5, 1953, it having been Botany's practice to mail Kuhn's monthly checks for services to his bank for deposit in his account. I have already directed judgment for defendant upon this second cause of action.

The case was submitted to the Court upon a written stipulation of facts for both causes of action, supplemented by the oral testimony of two physicians. Upon this medical testimony, I find as a fact that Kuhn became permanently physically disabled for the performance of the consulting services described in paragraph 2(b) of the contract hereinabove referred to. A copy of the contract was annexed to plaintiffs' trial memorandum and particularly referred to in the stipulation of facts.

The contract upon which Kuhn bases his claim recites that he had been in the employ of Botany for over 27 years and, on the date of the contract, was Vice-President of the company. The instrument further recites that Botany was desirous of having Kuhn continue in its employ in an active management capacity for the period ending December 31, 1951, and thereafter in a consulting capacity during his lifetime, and Kuhn expressed willingness to be so employed "provided he receives reasonable compensation for his services both during such active management period and thereafter during his lifetime in a consulting capacity." (Emphasis supplied). Accordingly the parties expressly agreed that Kuhn was to be employed in an active management capacity "similar to that in which he served the corporation during the past year," until December 31, 1951, at an annual salary of $35,000, payable in equal monthly installments, "and such contingent incentive compensation as may be determined in accordance with the existing plan therefor." Botany further agreed to employ Kuhn after December 31, 1951, and continuously during his lifetime, in a consulting capacity, "at an annual salary of $25,000." payable in similar installments. By further terms of the agreement, Kuhn undertook to be available "at all reasonable and proper times" for consulting purposes. He also agreed to abstain from competing in any way with the business of Botany. It was further provided that Botany might discontinue the monthly installments if Kuhn "failed reasonably to perform services as consultant" and if Kuhn should in any way be engaged in an activity competitive with Botany's business. The contract then continued, in part, as follows:

"* * * provided, however, that such payments shall nevertheless be continued during the lifetime of Kuhn but at the reduced rate of $15,000 per annum, if Kuhn is unable to perform the services set forth in (a) above (as consultant) because of permanent ailment and incapacity, if such permanent condition is attested by competent medical evidence submitted to the Corporation." (Emphasis supplied.)

Contending that the contract provisions for payment of $15,000 a year to Kuhn for life, from and after his becoming permanently ill and incapacitated, constitutes a provision of "accident or health insurance" as contemplated by the language of 26 U.S.C. § 22(b) (5), Kuhn seeks recovery of so much of the income tax paid for the year 1953 as was based upon his receipt of monthly payments at the rate of $15,000 per annum under the terms of the existing contract during that tax year. In support of this contention, Kuhn relies upon Haynes v. United States, 1957, 353 U.S. 81, 77 S.Ct. 649, 1 L.Ed.2d 671; and Epmeier v. United States, 7 Cir., 1952, 199 F.2d 508, approved in Haynes. This Court finds the facts in the case at bar clearly distinguishable from those in the cases relied upon by the plaintiffs and concludes, therefore, that defendant should have judgment upon the first count of the complaint.

The principle is well recognized that "`exemptions from taxation are not to be enlarged by implication if doubts are nicely balanced.'" United States v. Stewart, 1940, 311 U.S. 60, 71, 61 S.Ct. 102, 109, 85 L.Ed. 40, quoting from Trotter v. State of Tennessee, 290 U.S. 354, at page 356, 54 S.Ct. 138, 78 L.Ed. 358. "It is likewise true that Congress will be presumed to have used a word in its usual and well-settled sense." Stewart, supra, 311 U.S. at page 63, 61 S.Ct. at page 105, Cf., Waller v. United States, 1950, 86 U.S.App.D.C. 93, 180 F.2d 194.

In Haynes, supra, 353 U.S. 81, 77 S. Ct. 650, plaintiff's employer had established a plan of health insurance for all of its employees over a quarter of a century before Haynes became disabled. Such an insurance plan prevailed throughout the Bell Telephone System, of which his employer was a part. A copy of the plan, prepared in a form much like that of an insurance policy, was given by the employer to every person upon the commencement of his employment. The plan provided for the payment of definite amounts to all employees when disabled by accident or sickness. These payments were referred to as "sickness disability benefits" but their amount and the duration of the period during which they were to be paid varied with the length of employment service of the recipient. The Supreme Court defined health insurance as "an undertaking by one person for reasons satisfactory to him to indemnify another for losses caused by illness." Tested by this definition the facts in Haynes clearly disclose the existence of a plan of health insurance calling for payment of definite amounts to employees during disability resulting from accident or sickness. These payments. therefore, constituted "amounts received through accident or health insurance" which, by the terms of 26 U.S.C. § 22(b) (5) were excludable from the recipient's gross income.

The facts in Epmeier, supra, are generally similar to those in Haynes. In the former case, the employer, at the time the taxpayer commenced his employment, had in effect a life and health insurance plan for its employees, by the terms of which the right to benefits therefrom commenced with the commencement of the employment. The accrual of the right to become a beneficiary of the plan in Epmeier was conditioned upon satisfactory passing of a medical examination and it was provided that benefits under the plan were not to apply to recipients of Workmen's Compensation payments, except to the extent of the difference between the compensation payment and the amount of benefit to which the employee would otherwise be entitled under the plan. The employer reserved to itself the right to cancel payments if the employee did not fully cooperate with his employer respecting the employee's obligations under the plan. Epmeier also enunciated a definition of insurance as "a contract, whereby, for an adequate consideration, one party undertakes to indemnify another against loss arising from certain specified contingencies or perils." 199 F.2d 509.

Despite the comprehensiveness of the definitions enunciated in the two cases relied upon, it must be recognized that the Court's conclusion necessarily rested upon the factual foundation...