By Pension and Benefits Editorial Staff
Nonqualified stock options paid to railroad employees for services rendered are not taxable compensation for purposes of the payroll contributions due under the Railroad Retirement Tax Act of 1937, according to the United States Supreme Court. Writing for a divided 5-4 Court, Justice Neil Gorsuch explained that stock options are not a medium of exchange and do not qualify as “money remuneration,” as that term was ordinarily understood at the time the statute was enacted. In dissent, Justice Breyer suggested that the majority's constricted view of remuneration was “trapped in monetary time warp, limited to those forms of money commonly used in the 1930's.”
Railroad Retirement Tax Act
The Railroad Retirement Tax Act of 1937 (RRTA) provides railroad employees with a federally insured pension that is often more generous than that afforded under Social Security. In order to finance the pension, private railroads and their employees are assessed a tax based on an employee's compensation (Code Sec. 3201 (a)-(b) and Code Sec. 3221(a)-(b)). As further defined by the Act, compensation subject to the putative payroll does not include in-kind benefits (e.g., food, lodging, and railroad tickets), but is limited to “any form of money remuneration” (Code Sec. 3231(e)).
The issue before the Court was whether nonqualified stock options provided to executives and other employees of subsidiaries of the Canadian National Railway for services rendered constituted taxable compensation (i.e., money remuneration). The United States maintained that the stock options were subject to tax under the RRTA as taxable monetary remuneration because stock can be easily converted into money. The railway countered that the stock options were not money (i.e., “cash"), but more resembled in-kind benefits, which were explicitly not taxed under the pension practices in effect in 1937.
The Seventh Circuit affirmed a lower court ruling that the stock options were subject to tax as money remuneration, explaining that the fact that cash and stock are not the same thing does not make a stock option plan any less a form of money remuneration than cash (CA-7 (2017), 856 F. 3d 490). The Seventh Circuit decision was in accord with a ruling from the Fifth Circuit (BNSF Railway Co. v. United States,, CA-5 (2015), 775 F. 3d 743) but in conflict with a holding from the Eighth Circuit (Union Pacific R. Co. v. United States, CA-8 (2017), 865 F. 3d 1045). The Supreme Court agreed to hear the case in order to resolve the split in the Circuits.
Money must be a medium of exchange
In reversing the Seventh Circuit, Justice Gorsuch initially explained that, under the fundamental canon of statutory construction, words must be generally interpreted as taking their ordinary, contemporary and common meaning as understood at the time of the statute's enactment. He then noted that when Congress adopted the RRTA in 1937, money was ordinarily understood to mean currency issued by a recognized authority as a “medium of exchange.” Applying the dictionary meaning of “money,” Justice Gorsuch concluded that “[P]retty obviously, stock options do not fall within that definition.”
The RRTA's reference to money remuneration, Gorsuch continued, indicated that Congress “wanted to tax monetary compensation in any of the many forms an employer might choose--coins, paper currency, check, wire transfer, and the like.” However, the authority to tax any form of money remuneration did “not prove Congress wanted to tax things, like stock that aren't money at all.”
Justice Gorsuch acknowledged that an IRS regulation issued in 1938 stated that the RRTA taxes “all remuneration in money or something which may be used in lieu of money” (26 CFR Sec. 410.5). However, while the regulation lists salaries, wages, commissions, fees , bonuses, and scrip and merchandize orders as qualifying mediums of exchange, it does not suggest that stock (unlike money payments related to stock) would be taxable.
Gorsuch conceded that scrip is “capable of bearing the meaning of stock.” However, he explained that the “ordinary meaning “ of scrip at the time the IRS issued the regulation in 1938 did not encompass stock. Similarly, while the term “money” sometimes might be used in the expansive sense to include property that is convertible to money or that has a value expressible in terms of money, that was not how the term was ordinarily used at the time of the Act's adoption. The Congressional understanding that ‘not everything is money’ was further reflected in the fact that the RRTA, unlike the Federal Insurance Contributions Act (FICA) does not tax “all remuneration” and expressly does not tax in-kind benefits.
Finally, Gorsuch stressed that, because the meaning of a statute is fixed at the time of enactment, money, for purposes of the RRTA, must “always mean a medium of exchange.” As stock options “were not then-and are not now-recognized as mediums of exchange,” they are not subject to tax under the RRTA.
Dissent: Stock options remunerate employees monetarily
Stressing that a stock option is a means of remunerating employees monetarily, Justice Breyer in dissent initially explained that stock options are financial instruments that can be bought and sold, are not benefits in-kind, and are not difficult to value. Stock options, like paychecks, Breyer reasoned, are not money but clearly are a means of remunerating employees monetarily.
Rejecting the certainty of the majority opinion, Breyer observed that the conflicting language in the RRTA and FICA has effectively resulted in the meaning of monetary remuneration being unclear. Accordingly, Breyer suggested that the Court defer to contemporaneous IRS regulations interpreting RRTA compensation as reaching all remuneration in money, or in something that may be used in lieu of money, such as scrip.
As further contemporaneous support for the IRS interpretation, Breyer noted that Railroad Retirement Board Regulations issued in 1938 treated any form of money remuneration as including a commodity, service, or privilege that had an agreed upon value. Under this interpretation, Breyer explained, stock options, qualify as money remuneration because they have a discernible value (the difference between the option price and the market price upon exercise).
More recent Treasury regulations further clarify the government's historic position, stating the that compensation under the RRTA has the same meaning as the term “wages” in FICA, except as specifically limited by the RRTA. Clearly in the Treasury's view, Breyer charged, the RRTA did not specifically limit the application of its terms by excluding stock option from its coverage.
Finally, Breyer, unlike Gorsuch, conceded that, with respect to stock options, the RRTA has a degree of ambiguity. However, he reasoned that the “statute's purpose, along with its amendments, argues in favor of including stock options” in the compensation subject to tax under the Act.
Source: Wisconsin Central Ltd, et al v. United States, U.S. Supreme Court, No. 17-530.
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