Is stock subject to payroll tax for railway employees? SCOTUS will decide.


Railway employees obtained stock when they exercised their stock options. Does the railway have to pay a payroll tax on this? The US Supreme Court granted certiorari in Wisconsin Central Ltd. v. United States [Order] [Briefs] on January 12 to decide exactly that question.

Of course, a non-railway employee's exercise of a stock option is subject to the Federal Insurance Contributions Act (FICA), so an employer has to pay and withhold payroll taxes. But Congress exempted railroads from FICA and instead made them subject to a railroad-specific statute – the Railroad Retirement Tax Act (RRTA). Railways pay a percentage of employees' "compensation," which is defined as "any form of money remuneration paid to an individual for services rendered as an employee to one or more employers."

You would think this would be a no-brainer – that stock is not "money," so the stock options would not be taxable. And, indeed, that is what the 8th Circuit says. Union Pac. R.R. Co. v. United States, 865 F3d 1045 (8th Cir 2017) [PDF]. However, the 5th and 7th Circuits have held that stock options are taxable. BNSF Railway Co. v. United States, 775 F3d 743 (5th Cir 2015) [PDF]; Wisconsin Central Ltd. v. United States (7th Cir 2017) [PDF].

The railway's argument is simply that "money" means a medium of exchange such as dollars or pounds or Bitcoin. Although stock has cash value and can be exchanged for money, it's not a medium of exchange. My favorite line from their petition: "No one pays for groceries with stock."

The government leans hard on both the district court's decision and the 7th Circuit's opinion. The district court found "any form of money remuneration" to be ambiguous due to conflicting dictionary definitions. The district court noted that the statute carves out exceptions for a number of non-cash forms of remuneration, and found that those exceptions would have been unnecessary if those items were not "money remuneration" in the first place.

In addition, we have a Treasury Department regulation that says that RRTA "compensation has the same meaning as FICA "wages" – and that would incorporate FICA's definition: "all remuneration for employment, including the cash value of all remuneration (including benefits) paid in any medium other than cash."

You also have to appreciate the droll way in which Judge Posner wrote the 7th Circuit's opinion. He easily slips into his typical "Chicago school" economic analysis by saying "there is no significant economic difference between receiving a $1000 salary bonus and a share or shares of stock having a market value of $1000." And then he goes on: "Maybe stock then [in the 1930s] wasn't a form of money remuneration, but there is no reason to think that the framers and ratifiers of the Act meant money remuneration to be limited to cash even if, as was eventually to happen, stock became its practical equivalent, just as today 100 dimes is the exact monetary equivalent of a $10 bill. A $10 bill is paper; so is a stock certificate that can be sold for $10."

Given that we have a Treasury regulation that perhaps stretches the meaning of the RRTA beyond recognition, it will be interesting to see how much deference the Justices give to the Treasury regulation, or if they give it any deference at all. I especially await Justice Gorsuch's comments on deference to administrative agency interpretations. He's not a big fan of  Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 468 U.S. 837 (1984) [Text].

And with all due respect for Judge Posner – and I do respect him – stock is not the practical equivalent of cash.