Nonqualified employee stock options are not taxable compensation under the Railroad Retirement Tax Act. The Supreme Court concluded that the term “money remuneration” in the Act unambiguously excludes stock.
This case started when several railroads filed a refund claim for overpaid Railroad Retirement taxes. The railroads claimed they overpaid their taxes because they included the value of employee stock options when they calculated the taxes.
The IRS denied the refund request. The IRS argued that stock options were taxable “money remuneration” under the Act because stock can be easily converted into money.
The railroads replied that stock options are not money. Moreover, they argued, when Congress passed the Act it sought to mimic existing industry pension practices. Those practices generally ignored in-kind benefits like food, lodging and railroad tickets.
Railroad Stock Options Are Not Money Remuneration
The Supreme Court agreed with the railroads. When Congress adopted the Act in 1937, it understood “money” as “currency issued by a recognized authority as a medium of exchange.” Obviously, stock options do not fall within this definition.
Further, while stock can be bought or sold for money, it isn’t usually considered a medium of exchange. Few people use stock to value goods and services, buy groceries, or pay rent.
Also, the Act’s reference to “money remuneration” did not alter the meaning of the word “money.” Thus, “any form of money remuneration” indicated Congress wanted to tax money compensation. It did not indicate that Congress wanted to tax things, like stock, that are not money.
The broader statutory context pointed to the same conclusion. For example, the 1939 Internal Revenue Code treated money and stock differently. However, the Federal Insurance Contribution Act taxes all remuneration, including benefits paid in a medium other than cash.
Further, a contemporaneous IRS rule explained that the Railroad Retirement Act taxed all money compensation. The rule listed examples like salaries, wages, commissions and bonuses. It also included things that could be used as money, like scrip. However, the rule did not suggest that stock was taxable compensation.
Thus, Congress knew the difference between money and other forms of compensation. Its choice to use the narrower term for railroad pensions had to be respected.
Reversing and remanding CA-7, 2017-2 USTC ¶50,295.