Wisconsin Central Ltd. v. United States
2017 U.S. App. LEXIS 8152, 119 A.F.T.R.2d (RIA) 1747, 856 F.3d 490 (2017)
Rule of Law:
Income generated from the exercise of non-qualified employee stock options is considered a "form of money remuneration" and is therefore taxable compensation to the employer under the Railroad Retirement Tax Act (RRTA).
Facts:
- Beginning in 1996, subsidiaries of the Canadian National Railway Company ('the railway') began including non-qualified stock options in their employee compensation plans.
- The stock options granted employees the right to purchase company stock at a predetermined price, known as the 'strike price'.
- Employees could exercise these options when the market price of the stock was higher than the strike price, allowing them to acquire the stock at a favorable price.
- The railway's stock-option plans were performance-based, meaning they could only be exercised if the company achieved specified corporate goals.
- The railway offered a service where an agent could exercise an employee's stock option, sell the acquired shares, and deposit the net cash proceeds directly into the employee's bank account.
Procedural Posture:
- Subsidiaries of the Canadian National Railway Company ('the railway') sued the United States government in federal district court, seeking a refund for taxes paid.
- The railway argued that income from its employees' exercise of stock options was not taxable compensation under the Railroad Retirement Tax Act.
- The district court ruled in favor of the government, holding that the income was taxable.
- The railway, as the appellant, appealed the district court's decision to the U.S. Court of Appeals for the Seventh Circuit.
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Issue:
Does the income generated from employees exercising non-qualified stock options qualify as a "form of money remuneration" that is taxable to the employer under the Railroad Retirement Tax Act?
Opinions:
Majority - Posner, Circuit Judge
Yes, the income generated from employees exercising non-qualified stock options qualifies as a 'form of money remuneration' taxable under the Railroad Retirement Tax Act. The court reasoned that in modern society, stock has a well-defined monetary value, making it the practical equivalent of cash. The phrase 'money remuneration' is not static and can evolve to encompass instruments that function as money. Furthermore, the RRTA contains specific statutory exceptions for other forms of non-cash benefits (like qualified stock options and health insurance); the absence of an exception for non-qualified stock options supports the inference that Congress intended for them to be taxed. This interpretation also prevents the creation of a tax loophole that could distort how employers design compensation packages.
Dissenting - Manion, Circuit Judge
No, the income generated from employees exercising non-qualified stock options does not qualify as a 'form of money remuneration' taxable under the Railroad Retirement Tax Act. The dissent argued that statutes must be interpreted based on the ordinary meaning of their words at the time of enactment. When the RRTA was passed in the 1930s, 'money' meant cash and was consistently treated as distinct from 'stock.' Congress deliberately used the narrow term 'money remuneration' in the RRTA, while using the much broader term 'all remuneration... paid in any medium other than cash' in the parallel Social Security Act (FICA), demonstrating a clear intent to treat railroad compensation differently. The court should not expand the definition where Congress has not, as later-enacted exceptions do not change the unambiguous original meaning of the statute.
Analysis:
This decision adopts a dynamic approach to statutory interpretation, allowing the meaning of a term like "money remuneration" to evolve with modern economic realities rather than being frozen at its time of enactment. It establishes that for tax purposes under the RRTA, the economic substance of a payment (its cash-equivalence) can override a strict, historical definition. This ruling weakens the argument that differences between the RRTA and FICA tax bases are absolute, suggesting courts may harmonize them where modern financial instruments are concerned. The case serves as a key example of the tension between textualist/originalist interpretation and a more purposive, evolving view of statutory language.
