Updates
June 21, 2018
Supreme Court Decides Wisconsin Central Ltd. v. United States
On June 21, 2018, the Supreme Court decided Wisconsin Central Ltd. v. United States, No. 17-530, holding that a railroad company’s employee stock options are not taxable “compensation” under the Railroad Retirement Tax Act because they are not “money remuneration,” but are instead akin to the in-kind benefits that were commonly provided at the time of the Act’s adoption and that were made non-taxable by the Act.
The Railroad Retirement Tax Act of 1937, enacted by Congress to protect railroad employees from the threat of widespread railroad insolvency posed by the economic stress of the Great Depression, federalized private railroad pension plans. Under the Act, the federal government provides a pension to railroad employees, supported by a tax, levied on both the railroads and the employees. 26 U.S.C. §§ 3201(a)–(b), 3221(a)–(b). That tax is indexed to an employee’s “compensation,” a term that is defined to capture only “any form of money remuneration.” 26 U.S.C. § 3231(e)(1). At the time, it was common for railroads to provide in-kind benefits like food, lodging, and railroad tickets—to supplement their employees’ monetary compensation. The Act’s definition of “compensation” excludes such in-kind benefits. The appellant Wisconsin Central, which provides stock options to its employees, claimed that the Government’s attempt to tax these stock options under the Act misapplies the statutory definition. The district court rejected this claim, agreeing with the Government that the stock options were taxable, and a divided Seventh Circuit panel affirmed.
The Supreme Court reversed, holding that employee stock options are not “money remuneration” and are not taxable under the Act. The Court took as its starting point the plain meaning of the term “money remuneration,” observing that “money” refers to a commonly used medium of exchange, and that the term “remuneration”—which would otherwise have a broader meaning—is limited by the modifying adjective in this case. Stock options do not fit within this definition because they are not generally understood to be an index of value and are not accepted in exchange for goods and services. The Court concluded that this textual reading was bolstered by examining two of the Act’s near-contemporaries. The 1939 Internal Revenue Code treats “money” and “stock” as separate concepts, and the Federal Insurance Contributions Act employs a broad definition of “remuneration” without the “money” modifier, suggesting that Congress’s use of the narrower definition in the Act in question was intentional. A 1939 Bureau of Internal Revenue regulation lists “scrip”—a term that may be broad enough to embrace stock options—as a possible medium of exchange, but the Court reasoned that the regulatory suggestion that scrip could serve as a money equivalent is insufficient to override the plain meaning of the statutory terms.
Turning to the Government’s arguments, the Court first rejected an alternate, broader definition of money as “property or possessions of any kind viewed as convertible to money.” Applied in this context, the Court reasoned, such an “idiosyncratic” definition would render the term essentially limitless. The Court also rejected a structural counterargument that the Act’s express exclusion of qualified stock options from taxation must imply that nonqualified stock options like those at issue in this case must be subject to taxation in order to avoid reading the provision as surplusage. Relying on the statutory modifier “any remuneration on account of” qualified stock options, the Court concluded that this exclusion could relate to money payments made when qualified stock options are exercised (often to compensate for fractional shares), and thus can be interpreted consistently with its overall reading of the Act. In a similar vein, the Court concluded that a regulation implementing a separate statute, the Railroad Retirement Act, under which “money remuneration” could include in-kind benefits, did not support the Government’s position because that regulation contemplated that such benefits would be taxable only if the employer and employee agreed to treat them as money remuneration. Lastly, the Court rejected the Government’s argument that a more recent IRS regulation supporting its position warranted Chevron deference, ruling that the Act leaves no ambiguity to be filled by deference to agency expertise.
Justice Gorsuch delivered the opinion of the Court, in which Chief Justice Roberts and Justices Kennedy, Thomas, and Alito joined. Justice Breyer filed a dissenting opinion, in which Justices Ginsburg, Sotomayor, and Kagan joined.
Download Opinion of the Court.
The Railroad Retirement Tax Act of 1937, enacted by Congress to protect railroad employees from the threat of widespread railroad insolvency posed by the economic stress of the Great Depression, federalized private railroad pension plans. Under the Act, the federal government provides a pension to railroad employees, supported by a tax, levied on both the railroads and the employees. 26 U.S.C. §§ 3201(a)–(b), 3221(a)–(b). That tax is indexed to an employee’s “compensation,” a term that is defined to capture only “any form of money remuneration.” 26 U.S.C. § 3231(e)(1). At the time, it was common for railroads to provide in-kind benefits like food, lodging, and railroad tickets—to supplement their employees’ monetary compensation. The Act’s definition of “compensation” excludes such in-kind benefits. The appellant Wisconsin Central, which provides stock options to its employees, claimed that the Government’s attempt to tax these stock options under the Act misapplies the statutory definition. The district court rejected this claim, agreeing with the Government that the stock options were taxable, and a divided Seventh Circuit panel affirmed.
The Supreme Court reversed, holding that employee stock options are not “money remuneration” and are not taxable under the Act. The Court took as its starting point the plain meaning of the term “money remuneration,” observing that “money” refers to a commonly used medium of exchange, and that the term “remuneration”—which would otherwise have a broader meaning—is limited by the modifying adjective in this case. Stock options do not fit within this definition because they are not generally understood to be an index of value and are not accepted in exchange for goods and services. The Court concluded that this textual reading was bolstered by examining two of the Act’s near-contemporaries. The 1939 Internal Revenue Code treats “money” and “stock” as separate concepts, and the Federal Insurance Contributions Act employs a broad definition of “remuneration” without the “money” modifier, suggesting that Congress’s use of the narrower definition in the Act in question was intentional. A 1939 Bureau of Internal Revenue regulation lists “scrip”—a term that may be broad enough to embrace stock options—as a possible medium of exchange, but the Court reasoned that the regulatory suggestion that scrip could serve as a money equivalent is insufficient to override the plain meaning of the statutory terms.
Turning to the Government’s arguments, the Court first rejected an alternate, broader definition of money as “property or possessions of any kind viewed as convertible to money.” Applied in this context, the Court reasoned, such an “idiosyncratic” definition would render the term essentially limitless. The Court also rejected a structural counterargument that the Act’s express exclusion of qualified stock options from taxation must imply that nonqualified stock options like those at issue in this case must be subject to taxation in order to avoid reading the provision as surplusage. Relying on the statutory modifier “any remuneration on account of” qualified stock options, the Court concluded that this exclusion could relate to money payments made when qualified stock options are exercised (often to compensate for fractional shares), and thus can be interpreted consistently with its overall reading of the Act. In a similar vein, the Court concluded that a regulation implementing a separate statute, the Railroad Retirement Act, under which “money remuneration” could include in-kind benefits, did not support the Government’s position because that regulation contemplated that such benefits would be taxable only if the employer and employee agreed to treat them as money remuneration. Lastly, the Court rejected the Government’s argument that a more recent IRS regulation supporting its position warranted Chevron deference, ruling that the Act leaves no ambiguity to be filled by deference to agency expertise.
Justice Gorsuch delivered the opinion of the Court, in which Chief Justice Roberts and Justices Kennedy, Thomas, and Alito joined. Justice Breyer filed a dissenting opinion, in which Justices Ginsburg, Sotomayor, and Kagan joined.
Download Opinion of the Court.
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