Wisconsin Central Ltd. v. United States
138 S. Ct. 2067, 201 L. Ed. 2d 490, 2018 U.S. LEXIS 3837 (2018)
Rule of Law:
Employee stock options are not taxable as “compensation” under the Railroad Retirement Tax Act of 1937 because they do not constitute “money remuneration” based on the ordinary meaning of “money” as a medium of exchange at the time of the statute’s enactment.
Facts:
- In 1937, Congress enacted the Railroad Retirement Tax Act (RRTA) to federalize and fund railroad employee pension plans.
- The RRTA imposes a tax on employee 'compensation,' which the statute defines as 'any form of money remuneration.'
- At the time of its passage, the RRTA was intended to mimic existing railroad pension practices, which taxed monetary pay but excluded common in-kind benefits like food, lodging, and railroad tickets.
- Wisconsin Central Ltd. and other railroads implemented employee stock option plans as a form of performance-based compensation.
- Under these plans, employees could exercise their options to acquire company stock, including through a 'cashless exercise' method where the stock was immediately sold and the profits deposited as cash into the employee's account.
- The United States government, through the IRS, took the position that the value realized from exercising these stock options was taxable 'money remuneration' under the RRTA.
Procedural Posture:
- Wisconsin Central Ltd. and other railroads (Petitioners) challenged the assessment of RRTA taxes on employee stock options, likely by suing for a refund in a federal district court.
- The United States Court of Appeals for the Seventh Circuit ruled in favor of the United States, holding that employee stock options constituted taxable 'money remuneration.'
- The railroads were the Appellants and the United States was the Appellee in the Seventh Circuit.
- The Supreme Court granted a writ of certiorari to resolve a split among the circuit courts on this issue.
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Issue:
Do employee stock options constitute 'money remuneration' subject to taxation under the Railroad Retirement Tax Act of 1937?
Opinions:
Majority - Justice Gorsuch
No. Employee stock options are not taxable 'money remuneration' under the Railroad Retirement Tax Act. The ordinary public meaning of 'money' at the time of the statute's enactment in 1937 was a medium of exchange, and stock options do not fall within that definition. While stock can be sold for money, it is not itself money, as few people value goods or pay for services using stock. The statutory context confirms this interpretation; the contemporaneous Federal Insurance Contributions Act (FICA) taxed 'all remuneration,' demonstrating that Congress knew how to use broader language but chose the narrower term 'money remuneration' for the RRTA. Furthermore, early IRS regulations and other sections of the Internal Revenue Code from that era consistently treated 'money' and 'stock' as distinct concepts. The Court rejects arguments based on policy or agency deference, holding that the statutory text is unambiguous and must be interpreted according to its original meaning.
Dissenting - Justice Breyer
Yes. The term 'money remuneration' is ambiguous and should be interpreted to include stock options. The definition of 'money' is not limited to a medium of exchange; it can also encompass property that is readily convertible to money, which stock options are, especially via 'cashless exercise' that results in a direct cash deposit. The statute's purpose was to exclude hard-to-value in-kind benefits, not easily valued financial instruments like stock options. The statutory structure suggests inclusion, as a later amendment expressly exempts 'qualified stock options,' which would be superfluous if all stock options were already excluded. Given the ambiguity, the Court should defer to the long-standing interpretation of the IRS and the Railroad Retirement Board, which have treated stock options as taxable compensation, thereby promoting uniformity with the FICA tax system.
Analysis:
This decision is a significant affirmation of textualist and originalist statutory interpretation. The Court prioritizes the ordinary meaning of a word ('money') at the time of its enactment over modern financial realities or arguments about legislative purpose. This approach reinforces the principle that Congress must amend statutes to adapt them to new circumstances, rather than relying on courts or agencies to update them through interpretation. The ruling also limits the scope of Chevron deference by finding the statutory text 'unambiguous,' thereby precluding agency interpretation, a common move by the Court's textualist wing.
