Wisconsin Central Ltd. v. United States (US 17-530 6/21/18) Employee stock options not taxable “compensation” under Railroad Retirement Tax Act
As the Great Depression took its toll, struggling railroad pension funds reached the brink of insolvency. During that time before the rise of the modern interstate highway system, privately owned railroads employed large numbers of Americans and provided services vital to the nation’s commerce. To address the emergency, Congress adopted the Railroad Retirement Tax Act of 1937. That legislation federalized private railroad pension plans and it remains in force even today. Under the law’s terms, private railroads and their employees pay a tax based on employees’ incomes. In return, the federal government provides employees a pension often more generous than the social security system supplies employees in other industries.
This case arises from a peculiar feature of the statute and its history. At the time of the Act’s adoption, railroads compensated employees not just with money but also with food, lodging, railroad tickets, and the like. Because railroads typically didn’t count these in-kind benefits when calculating an employee’s pension on retirement, neither did Congress in its new statutory pension scheme. Nor did Congress seek to tax these in-kind benefits. Instead, it limited its levies to employee “compensation,” and defined that term to capture only “any form of money remuneration.”
It’s this limitation that poses today’s question. To encourage employee performance and to align employee and corporate goals, some railroads have (like employers in many fields) adopted employee stock option plans. The government argues that these stock options qualify as a form of “compensation” subject to taxation under the Act. In its view, stock options can easily be converted into money and so qualify as “money remuneration.” The railroads and their employees reply that stock options aren’t “money remuneration” and remind the Court that when Congress passed the Act it sought to mimic existing industry pension practices that generally took no notice of in-kind benefits. Who has the better of it?
Held: Employee stock options are not taxable “compensation” under the Railroad Retirement Tax Act because they are not “money remuneration.”
When Congress adopted the Act in 1937, “money” was understood as currency “issued by [a] recognized authority as a medium of exchange.” Pretty obviously, stock options do not fall within that definition. While stock can be bought or sold for money, it isn’t usually considered a medium of exchange. Few people value goods and services in terms of stock, or buy groceries and pay rent with stock. Adding the word “remuneration” also does not alter the meaning of the phrase. When the statute speaks of taxing “any form of money remuneration,” it indicates Congress wanted to tax monetary compensation in any of the many forms an employer might choose. It does not prove that Congress wanted to tax things, like stock, that are not money at all.
The broader statutory context points to this conclusion. For example, the 1939 Internal Revenue Code, adopted just two years later, also treated “money” and “stock” as different things. See, e.g., §27(d). And a companion statute enacted by the same Congress, the Federal Insurance Contributions Act, taxes “all remuneration,” including benefits “paid in any medium other than cash.” §3121(a). The Congress that enacted both of these pension schemes knew well the difference between “money” and “all” forms of remuneration and its choice to use the narrower term in the context of railroad pensions alone requires respect, not disregard.
Even the IRS (then the Bureau of Internal Revenue) seems to have understood all this back in 1938. Shortly after the Railroad Retirement Tax Act’s enactment, the IRS issued a regulation explaining that the Act taxes “all remuneration in money, or in something which may be used in lieu of money (scrip and merchandise orders, for example).” The regulation said the Act covered things like “[s]alaries, wages, commissions, fees, [and] bonuses.” But the regulation nowhere suggested that stock was taxable.
In light of these textual and structural clues and others, the Court thinks it’s clear enough that the term “money” unambiguously excludes “stock.”
Pp. 2–8. 856 F. 3d 490, reversed and remanded.
GORSUCH, J., delivered the opinion of the Court, in which ROBERTS, C. J., and KENNEDY, THOMAS, and ALITO, JJ., joined. BREYER, J., filed a dissenting opinion, in which GINSBURG, SOTOMAYOR, and KAGAN, JJ., joined.
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