*232 Decision will be entered for the respondent.
Petitioner seeks to exclude from his 1950 reported income the amount of $ 1,215.99 which represents sickness benefits paid to him during that year by his employer under a so-called Disability Benefit Plan as health insurance under section 22 (b) (5), I. R. C. 1939. Held, the amounts paid petitioner were not "health insurance" under section 22 (b) (5).
*1289 The Commissioner has determined a deficiency in the income tax of petitioner for the taxable year 1950 in the amount of $ 354.73. The sole issue for decision is whether the petitioner properly excluded from his reported income for that year under section 22 (b) (5) of the Internal Revenue Code of 1939 amounts received by him from his employer as sickness benefits.
FINDINGS OF FACT.
Petitioner is an individual residing at Philadelphia, Pennsylvania. His income tax return for the year 1950 was filed with the collector of internal revenue for the first district of Pennsylvania.
During the entire taxable year 1950 petitioner was employed by Esso Standard Oil Company, having been so employed since 1937. Since at least the year 1937 the *234 employer had maintained a "Disability Benefit Plan" which was still effective throughout the year here involved. Portions of the plan, which was printed in pamphlet form and so presented to all full-time employees, including petitioner, at the time of their being hired, are as follows:
Part I. Purpose:
This Disability Benefit Plan is adopted in order to provide for accident and sickness disability benefits for eligible employees beyond those payable by law
*1290 Part II. Definitions:
Wherever used in this Plan:
* * * *
(f) "Employee" shall mean a person who is regularly performing the duties of an established full-time job, position or office whether or not the person is a director. Persons working on a temporary, part-time or casual basis, and agents and salesmen on straight commission basis and persons working for such agents and salesmen, shall not be deemed employees for the purposes of this Plan unless the employer so declares them and then only under such regulations as the employer may from time to time prescribe with the approval of the committee.
The status of "employee" as defined herein shall pertain while the individual is absent from work to the extent determined*235 by the employer in accordance with its regulations.
* * * *
(i) "Rate of pay" shall mean:
(1) In the case of an employee working at a single rate, the base wage or salary in effect on the governing date.
(2) In the case of an employee who works regularly at two or more rates, the weighted average earnings (excluding overtime) based on the regular working schedule in effect on the governing date.
(3) In the case of an employee who works irregularly at several rates, the actual average earnings (excluding overtime) during the twenty days the employee worked full time immediately preceding the governing date.
(j) "Normal earnings" shall mean the amount the employee would have earned (excluding premium pay for overtime) had he worked, based on his rate of pay and his normal working schedule on the governing date. In the event the employee is eligible on the governing date to participate in a productive bonus or commission plan, the amount of any bonus or commission received under such plan within the twelve months immediately preceding the governing date shall be included in determining normal earnings. If the employee had not been eligible to participate in such bonus or commission*236 plan for all of such twelve months, then the average monthly amount of bonus or commission received within the consecutive full months immediately preceding the governing date during which he was eligible shall be multiplied by twelve and included in determining normal earnings.
(k) "Annuities" shall mean the disabled person's annuities under any annuity program of the Company or any affiliate or under any written agreement entered into by such person and the Company or any affiliate.
* * * *
Part III. Scope:
This Plan shall apply to employees in the domestic service of the Company and of any participating affiliate which shall have been designated by resolution of the Board of Directors as an affiliate eligible to participate; provided that, following such designation, the Plan shall have been ratified and adopted by such affiliate in a manner satisfactory to the Company. This Plan shall also apply to any group or class of employees engaged in foreign service of the Company or an affiliate if such group or class shall have been designated by resolution of the Board of Directors.
The Company may cancel any designation and an affiliate may cancel its ratification and adoption of*237 the Plan. Such cancellation shall not, however, affect any right arising hereunder as the result of any period of total disability which commenced prior to the date of such cancellation.
*1291 Part IV. Administration:
The Company and each participating affiliate shall administer the benefits provided under Parts V and VI for its own employees.
The Board of Directors will appoint an administrative committee. This committee shall administer the permanent disability benefits provided under Part VII for all employees of the Company and participating affiliates. This committee shall also administer all classes of benefits under the Plan for all employees the cost of whose benefits is to be assumed by the Company under Part VII, Section 2.
In the interest of uniform and impartial administration and notwithstanding any other provisions of this Part IV, there shall be submitted to the committee for final determination, binding on all parties concerned, all questions arising in the interpretation, administration and application of the Plan.
* * * *
Part VI. Sickness Benefits:
Section 1. Amount:
For total disability resulting from sickness (including accidental injury not subject*238 to the provisions of Part V), benefits shall be payable to any employee having one or more years' service, of which not less than a total of twenty-six weeks shall have been actually worked since the date of last employment, subject to the conditions outlined in this Plan. The schedule of benefits for such disability beyond the waiting period in effect at the place of employment is as follows:
| SCHEDULE OF BENEFITS | ||||||||||
| Years of service | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 or |
| more | ||||||||||
| Normal earnings -- weeks | 4 | 4 | 4 | 4 | 8 | 8 | 8 | 8 | 12 | 12 |
| One-half normal earnings -- weeks | 2 | 7 | 12 | 17 | 18 | 23 | 28 | 33 | 34 | 40 |
| Total weeks | 6 | 11 | 16 | 21 | 26 | 31 | 36 | 41 | 46 | 52 |
* * * *
Part VIII. General Provisions:
* * * *
Section 3. Payment of disability benefits:
(a) Payment of disability benefits under this Plan shall be contingent upon the execution and delivery of such releases and the taking of such other steps as may be prescribed by the employer.
(b) Payment of disability benefits to an employee shall be made in installments corresponding to his normal pay period, as they become due, unless some other interval or method is required by law or specifically*239 authorized by the employer.
* * * *
(h) Benefits under this Plan may be paid out of current earnings of the employer, out of book reserves established by such employer or reserves segregated for this purpose in a trust established by the Company or the employer; provided, however, that all or part of such liability may be insured under a contract of insurance with one or more insurance institutions made available to the employer by the Company.
(i) Any amount due the Company or an affiliate at termination of service may, in the discretion of the committee, be deducted from any permanent disability benefit granted under Part VII. The amount so withheld shall be paid to the creditor.
*1292 Section 4. Adjustment of benefits:(a) If any temporary disability benefit other than that payable under workmen's compensation or war veterans' legislation is payable by law to a disabled person for any period for which sickness benefits are payable under Part VI of this Plan, the amount of sickness benefits otherwise payable under this Plan for such period shall be reduced by the amount of such temporary disability benefit unless regulations issued by the employer with the approval*240 of the committee provide for some other procedure.
(b) If any old-age or permanent disability benefit other than that payable under workmen's compensation or war veterans' legislation is payable by law to a disabled person for any period for which accident or sickness benefits are payable under Part V or Part VI of this Plan, the amount of accident or sickness benefits otherwise payable under this Plan for such period shall be reduced by the amount of such old-age or permanent disability benefit.
(c) The amount of disability benefits payable under Part V or Part VI of this Plan shall be reduced by the amount of any annuities payable to the disabled person for the portion of the disability benefit period following termination of domestic service with the Company or any participating affiliate coincident with or subsequent to the beginning of such disability benefit period
Section 5. Benefits non-assignable:Benefits payable under this Plan shall be non-assignable and not subject to garnishment, attachment, execution or levy of any kind, and any attempted transfer or pledge of the same will not be recognized and may, in the discretion of the committee, work a forfeiture thereof. *241 Such benefits shall not under any circumstances be or become an asset of the estate of any disabled employee or ex-employee. * * *
* * * *
Part IX. Right of Change:
The Company reserves the right at any time in its discretion to amend or terminate this Plan in whole or in part as to all employees or any class or group of employees. Any participating affiliate shall also have the right to amend or terminate this Plan in whole or in part as to all or any class or group of employees of such affiliate. However, unless equivalent benefits are otherwise provided, no amendment or termination shall affect any rights to benefits under this Plan accrued by reason of any period of total or partial disability under Part V or any period of total disability under Part VI which commenced prior to the effective date of such amendment or termination, nor shall the terms and conditions of any permanent disability benefit grant under Part VII be subject to modification except to the extent that permanent disability benefits become available to the disabled person as a result of legislation enacted after the date of the grant.
Although the plan contains no provision for a medical examination as*242 a condition to inclusion of an employee thereunder, it was generally required as of the date of petitioner's employment as a full-time employee that all such employees must submit to such an examination.
During 1950 petitioner suffered an illness, nonoccupational in character, on two occasions. On those occasions he was unable to work. He was paid by his employer the total amount of $ 1,215.99 as sickness benefits under the plan, and it is the Commissioner's inclusion of this amount in his income for 1950 which gives rise to the deficiency *1293 here in issue. This amount was included by the employer in his withholding statement showing total wages of $ 6,208.82 and Federal income tax withheld of $ 885.37.
The payments to petitioner of sickness benefits were in the same amounts as would have been paid to him if he had continued at work and had not been sick.
No special reserve fund was set up to pay sick benefits by the employer and they are paid out of current earnings the same as any business expenses such as wages.
The employees pay no premiums in connection with the Disability Benefit Plan.
The employer is not authorized or licensed to issue policies of insurance or to*243 engage in the business of health insurance in the State of Pennsylvania.
OPINION.
Respondent takes the position that the plan under which sickness benefits were paid under the circumstances here presented does not fall within the phrase "health insurance" as it is used in the Internal Revenue Code of 1939, section 22 (b) (5); 1 that the phrase as there employed has a limited reference to ordinary commercial types of insurance policies either sold to individuals by authorized insurance companies or purchased therefrom by employers for the benefit of their employees. He relies upon our decision in Glen E. Blackburn, 15 T. C. 336, and George E. Murphy, 20 T. C. 746, and upon a 1950 decision of the Court of Appeals for the District of Columbia Circuit, Waller v. United States, 180 F.2d 194">180 F. 2d 194, and Moholy v. United States, 132 F. Supp. 32 (N. D., Cal., 1955).
*244 So far as can be ascertained this Court has never decided the precise question involved in this proceeding. We recognize there are decisions of other courts which would sustain a result contrary to that sought by respondent. Epmeier v. United States, 199 F. 2d 508 (C. A. 7, 1952); Haynes v. United States, 139 F. Supp. 671 (N. D., Ga., 1955); Herbkersman v. United States, 133 F. Supp. 495">133 F. Supp. 495 (D. Ohio, 1955). Nevertheless, we start with the proposition that statutes granting deductions from taxable income or exemptions from taxation are to *1294 be strictly construed. This has so often been held that it is not necessary extensively to cite the authorities. We simply refer to Peoples Finance & Thrift Co., 1052">12 T. C. 1052, construing the very section of the Internal Revenue Code with which we are here concerned. There we said, at page 1055, "A well founded doubt as to the meaning of an exemption statute is fatal to a claim of exemption from taxation."
With this proposition in mind we agree with respondent that petitioner has not brought himself *245 within the terms of section 22 (b) (5). He has not demonstrated that the amounts paid him by his employer were "received through * * * health insurance * * * as compensation for sickness * * *."
The crux of the question is whether the Disability Benefit Plan pursuant to which the payments were made constitutes or is to be taken as "health insurance" within the meaning of the statute. The meaning of these words is not free from doubt, but we take it they were used "in their ordinary service." Moholy v. United States, supra. We have examined the plan and its operation with care but cannot find that the employer here intended to or did as a matter of law become an insurer of petitioner's health. True, the employer, as part of its contract of employment with the petitioner undertook to pay him certain "sickness benefits," the amount being directly related to his length of service, his "normal earnings," etc., but not dependent in any way upon the degree or extent of his illness. But we do not think this puts the employer in the position of having issued "health insurance" to petitioner, as that term is ordinarily understood, or of having insured petitioner's*246 health. What the employer did, as we view the facts, is nothing more nor less than undertake to pay "sick leave pay" to petitioner or, to put it another way, to keep petitioner on the payroll during certain periods of illness when he was unable to work. There is a difference, to our way of thinking, between "health insurance" and the sick benefits payable under the Disability Benefit Plan, which, while hard to define, nevertheless exists. Sick pay is essentially tied into the employer-employee relationship. Such pay is earned by the employee as he works. He pays for it in no other way. No premiums are collected from him and no insurance fund exists. Fundamentally the amounts paid to petitioner fall within the broad definition of "gross income" contained in section 22 (a) which includes "income derived from salaries, wages or compensation for personal service." They are compensatory in nature, paid to him because he was an employee and not because his employer insured him against sickness.
In a recent decision, Branham, et al. v. United States, 136 F. Supp. 342">136 F. Supp. 342 (W. D., Ky., 1955), the court was concerned with a claim similar to that made here. *247 The taxpayer was an employee of Standard Oil *1295 Company of Kentucky. The plan there in effect was in many ways like the Disability Benefit Plan in effect here. It differed in that the plan there stated that it was a purely voluntary provision made by the company for its eligible employees and that it constituted no contract and conferred no right of action. There, as here, the employee paid nothing and the potential loss anticipated by the employee's sickness was borne by the company and was in no wise diffused through the group of employees. In deciding against the taxpayer the court said
There is no risk distribution and as quoted with approval in the case of Commissioner of Internal Revenue v. Treganowan, 2 cir., 183 F.2d 288">183 F. 2d 288, 291, "'The process of risk distribution, therefore, is the very essence of insurance.'"
We conclude that petitioner has not brought his sick benefits within the statutory exemption. In the succinct words of Judge Murphy in Moholy v. United States, supra, dealing with a problem similar to the one here,
"Sick leave with full pay" is an ordinary, well understood phrase. "Health*248 insurance" is likewise an ordinary, well understood phrase. Taking their ordinary meaning they are not the same. Sick leave pay is just not "amounts received through health insurance."
Decision will be entered for the respondent.
Withey, J., dissenting: Although the broad issue before us in this case is whether the benefits received under the Esso sickness benefit plan are excludible from gross income of the taxpayer under section 22 (b) (5) of the Internal Revenue Code of 1939, there are involved in that question two separate subissues: First, is the benefit plan a contract of health insurance and, second, if so, is the term "health insurance" as employed in that section broad enough to include employer-purchased or financed health insurance. Put another way, the second subissue may be stated as, whether the term "health insurance" may be limited in its meaning to only the ordinary commercial type of health insurance which is evidenced by a formal policy purchased from one generally engaged in the business of selling such insurance to the public.
Congress has clearly expressed the intention that "amounts received through * * * health insurance * * * as compensation*249 for * * * sickness" are to be excluded from gross income. The majority holding is to the effect that this clear language means that only such amounts as are received through insurance expressed in formal health insurance policies purchased from commercial purveyors of such policies are to be so excluded. In my view such a judicial amendment to the law cannot be justified. While it is true that courts may add words to a *1296 statute or disregard words which are employed, this is true only where to do otherwise would do violence to an evident legislative scheme or plan. No such underlying plan is apparent here nor is one pointed to or relied upon by the majority.
In my opinion the sickness benefit plan here in controversy is a contract of health insurance under the reasoning of Epmeier v. United States, 199 F. 2d 508, and the benefits received thereunder are excludible from the gross income of the petitioner under section 22 (b) (5).
Footnotes
1. SEC. 22. GROSS INCOME.
(b) Exclusions From Gross Income. -- The following items shall not be included in gross income and shall be exempt from taxation under this chapter:
* * * *
(5) Compensation for injuries or sickness. -- Except in the case of amounts attributable to (and not in excess of) deductions allowed under section 23 (x) in any prior taxable year, amounts received through accident or health insurance or under workmen's compensation acts, as compensation for personal injuries or sickness, plus the amount of any damages received whether by suit or agreement on account of such injuries or sickness, and amounts received as a pension, annuity, or similar allowance for personal injuries or sickness resulting from active service in the armed forces of any country;↩