Nonqualified Stock Options, Contract Ratification Payments Not Subject to RRTA Taxes (Union Pacific Railroad Company, CA-8)

A rail carrier was entitled to a refund of railroad retirement taxes that it paid on company stock it used to compensate employees. The Railroad Retirement Tax Act (RRTA) does not require the tax to be paid on stock compensation.

The government argued that employers who pay Federal Insurance Contributions Act (FICA) taxes are obligated to pay taxes on stock payments. Therefore, railroad employers should pay RRTA taxes on stock payments because IRS regulations treat FICA and RRTA taxes the same on this issue. However, unlike FICA taxes, which apply to an employee’s remuneration, the RRTA tax applies only to an employee’s money compensation. In addition, the government’s argument that “money” included stock paid to employees for services rendered was rejected. “Money” in the RRTA has the ordinary meaning it had at the time the RRTA was enacted. Accordingly, the definition of “money” did not include corporate stocks when the RRTA was enacted.

Moreover, payments made in stock are not a form of money remuneration. Even stocks with readily ascertainable share prices are not “money” because they are not mediums of exchange. Like any type of property, stock does have cash value and can be exchanged for money but it is not a medium of exchange.

Further, the government’s argument that both the RRTA and FICA should apply to stock compensation because the statutes share a similar purpose was rejected. Vague notions about statutory purpose cannot be used to override the statutes’ actual texts.

Finally, the RRTA did not require the railroad to pay taxes on ratification payments made to employees when their unions approved collective bargaining agreements. Although the ratification payments were “money remuneration,” they were not made for “services rendered” by the employees. The RRTA focuses on the authority and control an employer exercises over an employee when determining whether the employee is performing a “service.” Since the railroad did not exercise any control over whether its employees ratified the collective bargaining agreement, the employees were not performing a service for the employer. Therefore, the ratifications payments were not subject to RRTA taxes.

Reversing and remanding a DC Neb. decision 2016-2 ustc ¶50,353.

Union Pacific Railroad Company, CA-8, 2017-2 ustc ¶50,293

Other References:

Code Sec. 3401

CCH Reference – 2017FED ¶33,506.366

Tax Research Consultant

CCH Reference – TRC PAYROLL: 3,156

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