WILLIAM L. LUKHARD, COMMISSIONER OF THE VIRGINIA DEPARTMENT OF
SOCIAL SERVICES, PETITIONER V. ONA MAE REED, ET AL.

   No. 85-1358

   In The Supreme Court Of The United States

   October Term, 1986

   On Writ Of Certiorari To The United States Court Of Appeals For The
Fourth Circuit

   Reply Brief For The Secretary Of Health And Human Services As
Respondent Supporting Petitioner

   The Aid to Families with Dependent Children (AFDC) part of the
Social Security Act (Title IV, Part A of the Act, 42 U.S.C. (&
Supp.II)601 et seq.), establishes a cooperative federal-state
assistance program for "needy" dependent children and the persons who
care for them.  Shea v. Vialpando, 416 U.S. 251, 261 (1974).  To
ensure that only the most impoverished families receive this
assistance, however, the Act requires that participating states,
"except as may be otherwise provided in (the statute), * * * take into
consideration any other income and resources" of a family unit in
determining its eligibility for AFDC benefits (42 U.S.C. (Supp. II)
602(a)(7)(A) (emphasis added)), and prorate over a future period the
"amount of earned or unearned income which, together with all other
income for that month not (expressly required to be disregarded by the
statute), exceeds the State's standard of need * * *" (42 U.S.C.
(Supp. II) 602(a)(17)).  The Act charges the Secretary of Health and
Human Services (Secretary) with the responsibility for interpreting
and enforcing these requirements (see 42 U.S.C. (Supp. II) 602(a),
1302) and, in that role, the Secretary has determined that
participating states can and should treat personal injury and workers'
compensation awards as "income" for benefit eligibility computation
purposes.  See 51 Fed. Reg. 9205 (1986)(to be codified at 45
C.F.R.233.20(A)(3)(II)(F));  J.A. 58-59, 62-63, 66-67.  This Court's
precedents require that the Secretary's determination be sustained
unless it is unreasonable, even if some observers might find another
interpretation of the statute "more natural." Young v. Community
Nutrition Institute, No. 85-664 (June 17, 1986), slip op. 6;  United
States v. Riverside Bayview Homes, Inc., No. 84-701(Dec. 4, 1985),
slip op. 9-10, 17;  Chevron U.S.A. Inc. v. Natural Resources Defense
Council, Inc., 467 U.S. 837, 842-845 (1984).  Respondents have not
come close to showing that the Secretary's determination is
unreasonable.

   1. Respondents first claim (Br. 12-19) that, because personal
injury and workers' compensation awards produce no "gain or profit,"
the Secretary's treatment of such awards cannot be reconciled with the
"plain and ordinary" meaning of the term "income." This contention is
unfounded.

   The term "income" simply has no "plain and ordinary" meaning -- at
least not in the singular sense of "gain or profit" (as respondents
suggest).  See Resp. Br. 13-15.  "Income" is a term "having different
meanings, dependent upon the connection in which it is used and the
result intended to be accomplished." Ballentine's Law Dictionary
601(3d ed. 1969);  accord, Merrick v. Delavan Engineering Co., 243
Iowa 39, 48, 50 N.W.2d 586, 591 (1951);  Fullerton v. Central Lincoln
People's Utility District, 185 Or. 28, 32, 201 P.2d 524, 526 (1948);
Equitable Trust Co. v. Prentice, 250 N.Y. 1, 11, 164 N.E. 723, 725
(1928).  Thus, while the term "income" sometimes refers to receipts
which produce "gain or profit," that is not always the case.  /1/ See
Watkins v. Blinzinger, 789 F.2d 474, 476-478 (7th Cir. 1986).  And, as
we noted in our opening brief (at 17), this Court's decision in
Heckler v. Turner, 470 U.S. 184 (1985), makes clear that the AFDC
program's use of the term "income" is not limited to receipts
producing "gain or profit." Accordingly, the Secretary's determination
that personal injury and workers' compensation awards can and should
be treated as "income" is not rendered unreasonable by the fact that
such awards may not produce "gain or profit." /2/

   2. Respondents next contend (Br. 20-22) that the legislative
history of the 1981 amendment to the Act shows that Congress intended
to exclude personal injury and workers' compensation awards from the
definition of "income" in this statute.  This contention also has no
merit.

   As discussed in our opening brief (at 11-12, 14-16), the
legislative history of the 1981 amendment reveals that, in 1981,
Congress was troubled that the then "present treatment of (lump-sum)
payments ha(d) the perverse effect of encouraging the (AFDC) family to
spend such income as quickly as possible in order to retain AFDC
eligiblity." S. Rep. 97-139, 97th Cong., 1st Sess. 505 (1981) (Budget
Committee Report).  Congress responded to this problem by adopting the
Secretary's proposal that states be required to prorate over future
periods any lump-sum income received by an AFDC family -- at least to
the extent that the sum of the lump-sum payment and any other income
available to the family exceeded the state-defined standard of need.
See Staff of House Committee on Ways and Means, 97th Cong., 1st Sess.,
Description of the Administration's Legislative Recommendations Under
the Jurisdiction of the Ways and Means Comm. 53 (Comm. Print 1981);
Staff of Senate Committee on Finance, 97th Cong., 1st Sess., Proposals
for Reductions in Spending Programs Under the Jurisdiction of the
Senate Finance Committee 33 (Comm. Print. 1981).  The legislative
history makes no mention of any exclusion for personal injury or
workers' compensation awards.

   To be sure, both the 1981 amendment and its legislative history
indicate that Congress intended the new proration requirement to apply
only to a family's excess "income." See 42 U.S.C. (Supp. II)
602(a)(17);  House Comm. on Ways and Means, 97th Cong., 1st Sess., Tax
Aspects of the President's Economic Program 265 (Comm. Print 1981);
S. Rep. 97-139, supra, at 505.  Thus, Congress may not have intended
for the proration requirement to apply to all large payments of money.
 Cf. Resp. Br. 20-21.  But Congress did not define which large
payments of money would constitute "income" for this purpose.  Rather,
as the Seventh Circuit has recently concluded, "(t)he most that can be
said is that Congress did not prescribe any restriction on the
definition" of lump-sum income (Watkins v. Blinzinger, 789 F.2d at
480) and that Congress instead "committed to the Secretary and the
states" the task of defining which large payments would be included
within that term (id. at 483).  Accord Barnes v. Cohen, 749 F.2d 1009,
1017 (3d Cir. 1984).

   Therefore, respondents plainly err in suggesting (Br. 20-21) that
Congress intended for the proration requirement to apply only to
payments reflecting accumulated gain.  The Senate Finance Committee
Report from which respondents quote clearly uses retroactive social
security payments only as an example of a lump-sum payment that would
be subject to proration.  See S. Rep. 97-139, supra, at 436.
Moreover, when the Senate Finance Committee Report states that,
"(u)nder present law, any payments that meet the definition of income
* * * are counted as income" (ibid.), it does so against a background
in which some states had been defining "income" to include gifts,
inheritances, lottery winnings, damage claim settlements, and other
insurance benefits.  See J.A. 47, 58-59, 62-63, 66-67.  These lump-sum
payments plainly do not reflect accumulated gain.  As noted in our
opening brief (at 15), "(t)here is no reason to suppose that the
Congress that enacted (the proration requirement) legislated in
ignorance of" how states were treating these lump-sum payments -- to
wit, as "income." Heckler v. Turner, 470 U.S. at 197.

   3. Respondents attempt to avoid this inevitable interpretation of
congressional intent by suggesting (Resp. Br. 22-27) that the
Secretary's pre-1981 amendment "definition" of "income" did not
include personal injury or workers' compensation awards.  But this
suggestion is clearly incorrect.  /3/ As noted above, while the
Secretary required states to treat lump-sum payments representing
accumulated gain as "income" prior to 1981, he clearly also permitted
states, in the spirit of "cooperative federalism" (King v. Smith, 392
U.S. 309, 316 (1968)), to treat personal injury or workers'
compensation awards as "income." See J.A. 46-47, 58-59, 62-63, 66-67,
82-85.  This is the administrative "definition" of "income" that
Congress must have been aware of and approved when it enacted the
proration requirement in 1981.  See Heckler v. Turner, 470 U.S. at
197;  Young v. Community Nutrition Institute, slip op. 9;  NLRB v.
Bell Aerospace Co., 416 U.S. 267, 275 (1974).

   4. Respondents also err in arguing (Br. 27-38) that the Secretary's
position concerning the appropriate treatment of personal injury and
workers' compensation awards in state AFDC benefit eligibility
determinations has been inconsistent and, accordingly, is entitled to
no deference.

   Respondents' argument (Br. 28-29, 34) is based on a false premise:
that the Secretary first allowed states the option to treat personal
injury and workers' compensation awards as "income" after Congress
enacted the 1981 amendment.  As noted above and in our opening brief
(at 15 & n.3), the Secretary actually has permitted states the option
to treat personal injury and workers' compensation awards as "income"
since at least 1957.  See Watkins v. Blinzinger, 789 F.2d at 481 &
n.7;  see also J.A. 46-47, 58-59, 62-63, 66-67, 82-85.  This
long-standing practice led the Secretary to approve petitioner's
treatment of respondents' personal injury and workers' compensation
awards as "income" in this case;  it is entitled to deference and is
itself sufficient reason for reversal of the judgment below.  See
Young v. Community Nutrition Institute, slip op. 9;  CTFC v. Schor,
No. 85-621 (July 7, 1986), slip op. 11;  Haig v. Agee, 453 U.S. 280,
297-298 (1981).

   In any event, respondents err in suggesting (Br. 29-38) that the
Secretary's 1986 regulation is not entitled to this Court's deference.
 As noted in our opening brief (at 16), prior to 1981, it made little
difference whether certain nonrecurring lump-sum payments -- which the
Secretary traditionally termed "windfalls" -- were treated as "income"
or as "resources";  it not dissipated in the month of receipt, all
such "windfalls" became "resources" in the following month and
potentially disqualified a family from receiving AFDC benefits.  Thus,
recognizing that states have "legitimative local policies in
determining eligibility" (Batterton v. Francis, 432 U.S. 416, 431-432
(1977)), the Secretary allowed states the option to treat lump-sum
"windfalls" as either "income" or "resources." The 1981 amendment,
however, made the distinction between "income" and "resources" one
with important consequences;  if treated as "income," the "windfall"
could disqualify a recipient family from receiving AFDC benefits for
several months.  The states responded to this new rule differently
and, after a spate of litigation resulted, the Secretary determined
that for the first time the Act's orderly administration required a
uniform definition of the term "income." See 49 Fed. Reg. 45558, 45561
(1984).  Thus, contrary to respondents' argument (Br. 29-31), it was
the Act's 1981 amendment (and the administrative problems associated
with it) which provided the impetus and need for the Secretary's 1986
regulatory action.

   Respondents' contention (Br. 9 n.2, 31-32 & n.10, 37 n.11) that,
because he is involved in litigation on the issue, the Secretary
cannot resolve by regulation whether the term "income" encompasses
personal injury awards is simply wrong.  "Congress authorized the
issuance of regulations so that problems arising in the administration
of the statute could be addressed.  Litigation often brings to light
latent ambiguities or unanswered questions that might not otherwise be
apparent.  Thus, * * * (w)hen (the agency) responded to this problem
by issuing regulations(,) it was doing no more than the task which
Congress had assigned it." United States v. Morton, 467 U.S. 822,
835-836 n.21 (1984).

   Respondents' argument (Br. 31-33) that the 1986 regulation departs
from prior policy statements of the Secretary is also mistaken.  The
1986 regulation simply does not, as respondents mistakenly assert,
require states to treat lump-sum payments received from the sale of
real or personal property as "income." To the contrary, the 1986
regulation requires states to treat only lump-sum "windfalls" (and
accumulated gains) as "income." See 51 Fed. Reg. 9205 (1986)(to be
codified at 45 C.F.R. 233.20(a)(3)(ii)(F));  see also 51 Fed. Reg.
9196-9197 (1986).  The Secretary has never characterized proceeds from
the sale of property as lump-sum "windfalls." See 47 Fed. Reg. 5648,
5657 (1982).  By contrast, the Secretary has traditionally
characterized casualty loss and personal injury/workers' compensation
awards as lump-sum "windfalls." See J.A. 62-63, 66-67.  The final
regulation thus requires states to treat personal injury/workers'
compensation and casualty loss awards (but not proceeds from the sale
of property) as "income" -- at least to the extent such awards are not
precommitted to other uses.  See 51 Fed. Reg. 9205 (1986).  In short,
the Secretary's treatment of personal injury/workers' compensation
awards, casualty loss awards, and proceeds from sale of property has
been completely consistent over the years.  /4/

   Finally, there is no merit to respondents' claim (Br. 31, 34-38)
that the Secretary promulgated this regulation in violation of the
Administrative Procedure Act's "notice and comment" requirements.
When the Secretary published the proposed regulation in the Federal
Register, he indicated that the regulation would require states to
treat all lump-sum "windfalls" as "income" for purposes of the
proration rule.  See 49 Fed. Reg. 45561 (1984).  The Secretary has
characterized personal injury and workers' compensation awards as
"windfall" payments since at least 1957.  See J.A. 58;  see generally
J.A. 46-48, 62-63, 67-68.  Accordingly, several commentators
specifically questioned whether the Secretary intended to require
proration of personal injury or workers' compensation awards and, if
so, whether such proration was fair or necessary.  See 51 Fed. Reg.
9197 (1986).  The Secretary responded to these comments 0oth by
stating that proration of personal injury awards "is consistent with
Congressional intent that nonrecurring lump-sum payments be used to
meet current as well as future needs" and by amending the regulation's
wording to "clarify the policy and avoid future misunderstanding as to
the() (appropriate) treatment" of such awards (ibid.).  While
respondents may not agree with the Secretary's decision, they plainly
err in suggesting that the final regulation was not "a 'logical
outgrowth' of the original proposal and the notice and comments upon
it." Kennecott v. EPA, 780 F.2d 445, 452-453 (4th Cir. 1985), cert.
denied, No. 85-1741 (Oct. 6, 1986) (quoting American Paper Institute
v. EPA, 660 F.2d 954, 959n.13(4th Cir. 1981)).  See also Chocolate
Mfrs. Ass'n of v. Block, 755 F.2d 1098, 1103-1105 (4th Cir. 1985);
BASF Wyandotte Corp. v. Costle, 598 F.2d 637, 643-644 (1st Cir. 1979),
cert. denied, 444 U.S. 1096 (1980).  Indeed, the fact that respondents
have been litigating since 1983 the question whether the Secretary may
allow states to treat personal injury awards as "windfall" income
subject to proration makes all the more untenable their claim that the
Secretary's 1984 notice of rulemaking was inadequate.  See J.A. 9, 21.

   5. All that remains, therefore, is to consider respondents' claim
(Br. 38-43) that, even if petitioner may treat personal injury and
workers' compensation awards as "income" without violating the Act,
petitioner has violated the Secretary's "equitable treatment"
regulation by subjecting those awards, but not casualty loss payments,
to the proration requirement.  See 45 C.F.R. 233.10(a)(1).  As noted
in our opening brief (at 18-19), the promulgation of the Secretary's
1986 regulation renders this claim prospectively moot.  /5/ Moreover,
the claim is without merit.  It was clearly Congress's intent both
that the states have substantial discretion in defining eligibility
requirements in the AFDC program and that the Secretary and courts
generally defer to any rational judgment the states make.  See
Batterton v. Francis, 432 U.S. at 430-432;  King v. Smith, 392 U.S. at
318;  Dandridge v. Williams, 397 U.S. 471, 478-479 (1970);  Watkins v.
Blinzinger, 789 F.2d at 478.  Here, petitioner rationally and
reasonably determined (Br. 19-20) that AFDC families in its
jurisdiction could fairly be expected to budget personal injury and
workers' compensation, but not casualty loss, awards.  Accordingly,
the Secretary has refused throughout this litigation to find that
petitioner violated the "equitable treatment" regulation.  The
Secretary's interpretation of his own regulation is entitled to
substantial deference from this Court.  See Blum v. Bacon, 457 U.S.
132, 141-142, 145-146 (1982);  see generally Lyng v. Payne, No.
84-1948 (June 17, 1986), slip op. 12-13.  Therefore, respondents'
claim of "inequitable treatment" should be rejected.

   For the reasons stated above and in our opening brief, the judgment
of the court of appeals should be reversed.

   Respectfully submitted,

   CHARLES FRIED

      Solicitor General

   DECEMBER 1986

   /1/ Indeed, the very sources that respondents cite (Br. 13-15)
confirm this point.  Leading dictionaries in fact state that a more
preferred use of the term "income" refers to all receipts, not just
those producing "gain or profit" to the recipient.  See Webster's
Third New International Dictionary 1143 (1976 ed.) (defining "income"
as "something that comes in as an increment or addition(,) usu(ally)
by chance");  Black's Law Dictionary 687 (5th ed. 1979) (defining
"income" as "(t)he return in money from one's business, labor, or
capital invested;" including but not limited to "gains, profits,
salary, wages, etc.");  see also 42 C.J.S. Income 528,
529(1944)(footnote omitted)("Generally or ordinarily the term
("income") means all that comes in * * *.").  Likewise, as shown in
our opening brief (at 17-18 & n.4), the term "income" is used in the
Internal Revenue Code, the Food Stamp Program, and the federal poverty
guidelines in an all-inclusive sense.  See 26 U.S.C.(& Supp. II)
61(a)("gross income" in the Internal Revenue Code means "all income
from whatever source derived");  7 U.S.C. 2014(d)("Household income
for purposes of the food stamp program shall include all income from
whatever source(derived)");  48 Fed. Reg. 7010(1983)(Income "(r)efers
to total cash receipts before taxes from all sources.").  Amounts
received as personal injury awards are excluded from "income" in these
programs only by express provision.  See 26 U.S.C. 104(a) (Internal
Revenue Code exclusion);  7 U.S.C. 2014(d)(8)(Food Stamp Program
exclusion);  48 Fed. Reg. 7011 (1983) (poverty guidelines exclusion).
Such exclusions would be unnecessary if the "plain and ordinary"
meaning of the term "income" was limited, as respondents suggest, to
receipts producing "gain or profit."

   /2/ In any event, respondents err in suggesting (Br. 15-19) that,
because such awards are compensatory in purpose, personal injury and
workers' compensation awards cannot produce "gain or profit." "Much of
the value of (a personal injury or workers' compensation) award may
represent lost wages, past and future." Watkins v. Blinzinger, 789
F.2d 474, 476(7th Cir. 1986).  Similarly, much of the remainder of any
such award -- attributable to pain and suffering, property damage,
and/or bodily mutilation -- may "reflect loss in future market
opportunities" (id. at 476-477).  To this extent, "the award for the
loss therefore is a substitute for * * * (reduced potential) earnings"
(id. at 477), and thus constitutes "income" in even the narrow sense
in which respondents seek to confine the term.

   /3/ Respondents' suggestion (Br. 26-27) that treating personal
injury and workers' compensation awards as "income" will undermine the
cost-savings goals of the 1981 amendment is equally mistaken.
Personal injury and workers' compensation awards are subject to
proration only to the extent they are not precommitted to other uses
-- such as attorney fees, back medical bills, Medicaid reimbursements,
funeral expenses, and burial costs.  See 51 Fed. Reg. 9205 (1986) (to
be codified at 45 C.F.R. 233.20(a)(3)(ii)(F)).  Therefore, receipt of
a personal injury or workers' compensation award will disqualify a
family from receiving AFDC benefits only if, and to the extent, the
amount remaining after these expenses are paid exceeds the state's
standard of need.  On that basis, the Secretary has quite reasonably
determined that AFDC families will continue to have sufficient
incentives to bring personal injury and workers' compensation suits
and that, on balance, prorating the excess of any awards they receive
therein will reduce the cost of the AFDC program.  51 Fed. Reg.
9196-9197 (1986) (estimating that requiring states to treat all
lump-sums, including personal injury and workers' compensation awards,
as "income" subject to proration will save the federal government $1
million annually).  Respondents' contrary suggestion is unfounded.

   /4/ Personal injury and casualty loss awards, like lottery winnings
and inheritances, and unlike the proceeds from property sales, reflect
an element of chance -- fortunate or unfortunate.  The 1986 regulation
reflects the Secretary's new determination that AFDC families
reasonably can (and should) be expected to budget awards associated
with chance;  these families have funds available to them that
otherwise similarly situated families -- i.e., families who have
suffered the same loss or made a similar payment (for an insurance
policy or lottery ticket), but who have received no payoff of chance
-- do not have.  The Secretary's determination is a rational one and
is entitled to the deference of this Court.  See Dandridge v.
Williams, 397 U.S. 471 (1970).

   /5/ Respondents' arguments concerning why the "equitable treatment"
claim is not moot (Br. 39-40) are contradictory.  The argument that
individuals suffering personal injuries will continue to be treated
inequitably because they are less able than individuals suffering
casualty losses to repair or replace their lost assets does not show
that similarly situated individuals are being treated differently;  to
the contrary, it urges that the two categories of persons are not
similarly situated and thus inadvertently concedes that petitioner has
had a reasonable basis for concluding that individuals suffering
personal injuries are not similarly situated to persons suffering
casualty losses.  See Watkins v. Blinzinger, 789 F.2d at 481-482
("equitable treatment" regulation requires only that state treat "like
things alike").  Thus, on respondents' own terms, they are not
entitled to prevail with respect to their "equitable treatment" claim
relating to the period of the prospective injunction ordered but
stayed during October 1984 to March 1986.