BNSF Railway Co. v. Loos

LII note: The U.S. Supreme Court has now decided BNSF Railway Co. v. Loos .


Are damages for lost wages in a personal injury suit brought under the Federal Employers Liability Act taxable as “compensation” under the Railroad Retirement Tax Act?

Oral argument: 
November 6, 2018

In this case, the Supreme Court will decide whether time lost awards are taxable as “compensation” under the Railroad Retirement Tax Act. BNSF Railway Company argues that such awards are taxable because they fall within the employer-employee relationship, especially when the Railroad Retirement Tax Act is read in conjunction with the Railroad Retirement Act. Michael Loos counters that the plain text of the Railroad Retirement Tax Act does not include time lost awards in its definition of “compensation” and that regardless, Internal Revenue Code (“I.R.C.”) § 104(a)(2) excludes personal injury awards from taxation. The outcome of this case will determine the contours of the definition of “compensation” in the Railroad Retirement Tax Act as well as the extent to which the Railroad Retirement Tax Act and the Railroad Retirement Act should be interpreted as a unified statutory scheme.

Questions as Framed for the Court by the Parties 

Whether a railroad’s payment to an employee for time lost from work is subject to employment taxes under the Railroad Retirement Tax Act.


Respondent Michael Loos (“Loos”) is a former employee of Petitioner, BNSF Railway Company (“BNSF”). During his employment with BNSF, Loos incurred a number of attendance policy violations, some of which Loos attributed to “flare-ups” of a workplace injury. Due to repeated attendance policy violations, BNSF terminated Loos’s employment on November 29, 2012. Loos subsequently brought suit in the United States District Court for the District of Minnesota, alleging retaliation under the Federal Railroad Safety Act (“FRSA”), codified at 49 U.S.C. § 20109, and negligence under the Federal Employers Liability Act (“FELA”), codified at 45 U.S.C. § 51.

The district court dismissed Loos’s FRSA claim via summary judgment. The FELA claim went to trial, where a jury awarded Loos damages totaling $126,212.78, $30,000 of which comprised lost wages. BNSF then moved to alter or amend the judgment under Federal Rule of Civil Procedure 59(e), arguing that the $30,000 lost wages award should be offset by the tax that BNSF was required to withhold on Loos’s behalf under the Railroad Retirement Tax Act (“RRTA”), codified at Internal Revenue Code (“I.R.C.”) § 3201 et seq. The district court denied BNSF’s motion, holding that I.R.C. § 104(a)(2), which excludes personal injury awards from a taxpayer’s gross income, insulates the lost wages award from taxation under the RRTA. In other words, the court ruled that none of Loos’s $30,000 lost wages award was subject to taxation under the RRTA. Both parties then appealed. Loos appealed the summary judgment against the FRSA claim, and BNSF cross-appealed the denial of its Rule 59(e) motion.

On appeal, the Eighth Circuit affirmed both the summary judgment against Loos’s FRSA claim and the denial of BNSF’s Rule 59(e) motion. In affirming the district court’s denial of BNSF’s Rule 59(e) motion, the Eighth Circuit reasoned that the RRTA imposes tax on employee compensation, and that, by its plain text, the RRTA’s definition of “compensation” does not encompass damages for lost wages. Specifically, the Eighth Circuit noted that the RRTA defines “compensation” as “remuneration . . . for services rendered.” Because an award for lost wages is not given for services actually rendered, the Eighth Circuit reasoned, such an award is not compensation under the RRTA. BNSF argued that the RRTA should be interpreted in hand with the Railroad Retirement Act (“RRA”), codified at 45 U.S.C. § 231 et seq., which defines “compensation” similarly but specifically includes “pay for time lost” within its definition. The Eighth Circuit rejected this argument, determining that the RRTA’s legislative history shows that Congress intended for the RRTA and RRA to have different definitions of “compensation.” In so disposing of the RRTA issue, the Eighth Circuit did not consider whether I.R.C. § 104(a)(2) applies to the RRTA.

The United States Supreme Court granted certiorari on May 14, 2018.



Petitioner BNSF argues that the RRTA’s definition of taxable “compensation” includes an employer’s payment to an employee for lost wages. BNSF cites the RRTA definition of “compensation” as “any form of money remuneration paid to an individual for services rendered as an employee to one or more employers.” BNSF asserts that because FELA damages awarded for lost wages fall within the employer and employee relationship, these damages are “remuneration . . . for services rendered” and thus are taxable under the RRTA. In support of this assertion, BNSF contends that the Court should read the RRTA’s definition of compensation broadly to include any form of employer payment to an employee. BNSF believes the Eighth Circuit’s narrow reading of “services rendered” as limited to only services actually performed by an employee restricts the RRTA’s definition of compensation in a way that Congress did not intend. In fact, BNSF notes that Congress explicitly removed “active service” from its definition of compensation in 1937. Furthermore, BNSF argues, the express exceptions to compensation under the RRTA include payments made by an employer under an employee’s sickness or disability plan, exceptions that would be useless if compensation only included payment for active employee service.

Additionally, BNSF contends that because Congress enacted the RRA and the RRTA simultaneously and both acts deal with the same subject matter—railroad employee compensation—the RRA can be used to interpret the meaning of compensation in the RRTA. BNSF asserts that because the two statutes define compensation identically, except for the additional language in the RRA specifying that compensation includes payment for time lost. Therefore, BNSF contends, the Court should view this additional language as a mere illustrative example of compensation, rather than a delineation between the definition of compensation under the RRA and the definition of compensation under the RRTA. In fact, BNSF contends that this language in the RRA illustrates that payments for lost wages are payments for “services rendered,” and are thus included in the definition of compensation under both the RRA and the RRTA.

Conversely, Respondent Michael Loos argues that the RRTA’s definition of compensation does not include FELA damage awards. Loos contends that damage awards for lost wages are not payments for “services rendered,” because that phrase refers to an employee performing services for an employer in exchange for payment. Instead, Loos asserts that payments for time lost are damages paid to an employee for wages that the employee lost because the employee was unable to perform services for the employer. Additionally, Loos emphasizes that a FELA damage award is a payment for an employer’s negligence, not for work performed by an employee. In response to BNSF’s argument that the RRTA’s explicit exceptions to taxable compensation confirm that compensation can include payments for non-active employee service, Loos emphasizes that sickness and disability benefits “are part of an employee’s package of compensation for rendering services,” while payment for employer negligence is not. . As an alternative, Loos also argues that even if the Court determines that the RRTA’s definition of compensation includes payment for time lost, a FELA damage award does not qualify as a payment for time lost because no evidence suggests that Congress ever intended for the definition of “pay for time lost” to encompass FELA damage awards.

Furthermore, Loos emphasizes that the plain text of the RRTA does not include any reference to payment for time lost. Loos contends that Congress used the phrase “including remuneration paid for time lost as an employee” in the RRA’s definition of compensation not as an example of payment for “services rendered,” but as an additional type of compensation under the RRA. Loos also notes that Congress explicitly removed the words “pay for time lost” from the RRTA’s definition of compensation. Therefore, Loos argues that reading time lost payments back into the RRTA’s definition of compensation would contradict congressional intent. Finally, Loos asserts that the Court should not use the RRA to interpret the RRTA’s definition of compensation because the statutes contain different language, they are located in different U.S. Code titles, and they deal with different subject matters, as the RRA deals with benefits and the RRTA deals with taxation.


In response to Loos’s argument in the lower court that I.R.C. § 104(a)(2)—the Internal Revenue Code’s exclusion of damages for physical injury from gross income—extends to the RRTA’s tax on employee income, BNSF asserts that I.R.C. § 104(a)(2) only provides taxpayers with an exclusion from “gross income,” which is a different term than “compensation.” BNSF notes that I.R.C. § 104 does not reference the RRTA and vice versa. The RRTA, BNSF emphasizes, explicitly excludes from its definition of compensation many exclusions from gross income that are contained in the Internal Revenue Code, but does not list an exclusion for personal injury awards. Thus, BNSF contends, the language of the RRTA unambiguously demonstrates that Congress did not intend to exclude personal injury awards from taxable compensation under the RRTA, especially considering that the RRTA previously contained language that expressly included personal injury payments as taxable compensation. Furthermore, BNSF asserts that even if the RRTA’s language was ambiguous, for the past fifty years the Internal Revenue Service (“IRS”) has consistently held railroad employees liable under the RRTA for taxes on personal injury awards. BNSF maintains that this determination by the IRS deserves deference from the Court. In support of this assertion, BNSF argues that the IRS’s revenue rulings already established that I.R.C. § 104(a)(2)’s personal injury exclusion does not apply to taxable compensation under the RRTA by stating that FELA settlements can be taxed under the RRTA.

Loos, on the other hand, contends that I.R.C. § 104(a)(2)’s exclusion of personal injury awards from gross income applies to the RRTA’s tax on employee income because Congress designed the RRTA to tax railroad employees’ income. In fact, Loos notes that the text of the RRTA explicitly states that its tax is “imposed on the income of each employee.” Additionally, Loos counters that the explicit exclusions listed in the RRTA all apply to both employers and employees. Therefore, Loos argues that the fact that Congress did not explicitly list personal injury awards described in I.R.C. § 104(a)(2) as an exclusion in the RRTA merely indicates that Congress chose not to exclude personal injury damages from employer taxes—not employee taxes. Additionally, Loos points out that all of the RRTA’s exclusions are benefits provided by employers to employees for “services rendered,” and because Loos argues that FELA damages fall outside payment for “services rendered,” Loos maintains that Congress did not need to explicitly exclude these damages from the RRTA’s definition of compensation. In response to BNSF’s argument that the IRS deserves deference in this matter, Loos argues that the Court should not defer to the IRS because the RRTA is unambiguous in meaning. Even if the RRTA’s language was ambiguous, Loos contends, no IRS regulation specifically addresses the question before the Court. Moreover, Loos asserts that revenue rulings are not binding, and even if they are persuasive, the rulings cited by BNSF refer to FELA settlements, not FELA judgments. Finally, Loos argues that in the past eighty years the IRS has not taxed FELA damage awards under the RRTA.



In support of BNSF, the Association of American Railroads (“AAR”) argues that. because railroads are subject to a unique set of statutes, the Court should interpret railroad statutes in tandem with each other. In particular, the AAR continues, the Court should analyze the RRA and RRTA as an “inextricably interconnected” statutory scheme: the RRA provides social security-like benefits to railroad employees, and the RRTA funds those benefits. The AAR claims that both the Railroad Retirement Board (“RRB”), which administers the RRA, and the IRS, which administers the RRTA, consider time lost awards a form of compensation. The United States, also arguing in support of BNSF, similarly claims that the RRTA’s definition of “compensation” includes any payment that “arises out of the employment relationship,” which includes time lost awards. Accordingly, the AAR concludes, taxes on time-lost awards were intended to help fund the benefits administered under the RRA.

The AAR consequently argues that the Eighth Circuit’s narrow reading of the RRTA—that compensation contemplates payments for services only actually rendered—frustrates this unified scheme and jeopardizes other RRA funding sources, such as payroll taxes levied on vacation and sick pay. As the AAR points out, neither vacation pay nor sick pay represents compensation for services actually rendered, yet the taxes levied on these payments constitute “many millions of dollars” and have never been questioned. The AAR warns that preventing the RRTA from reaching such payments would upset the “carefully calibrated balance between benefits and funding,” which would mean that the RRA would have to secure other funding sources. The AAR claims that the application of I.R.C. § 104(a)(2) would likewise frustrate this benefits/funding balance, so therefore § 104(a)(2) cannot override taxation under the RRTA.

Arguing in support of Loos, The International Association of Sheet Metal, Air, Rail, and Transportation Workers (“SMART”) and The Academy of Rail Labor Attorneys (“ARLA”) contend that the RRA does not require a symmetric relationship between the amount that a railroad employee pays in taxes and the amount that the employee receives in benefits. SMART and ARLA analogize this tax/benefits asymmetry to social security, arguing that some social security beneficiaries receive a disproportionate amount of benefits whereas others do not receive any benefits at all. Given this, SMART and ARLA continue, it is “consistent with the RRA’s purpose” if injured workers end up receiving a disproportionate amount in benefits. The American Association for Justice (“AAJ”) likewise disagrees that exempting time-lost awards from RRTA taxation will cause a funding shortfall for RRA benefits, claiming that the RRB has a funding surplus of $25.1 billion dollars.

SMART and ARLA also claim that taxing time-lost awards will cause the very funding disparity between the RRA and RRTA that BNSF’s amici argue against. This disparity would be evident, SMART and ARLA contend, in the case where a railroad negligently causes an employee’s death. If the deceased employee’s family wins a time lost award, and that award is taxable under the RRTA, then the employee’s family will in effect be funding future benefits which they may never receive. SMART and ARLA argue that this funding disparity could also arise in situations where a railroad employee is injured before the employee’s RRA benefits vest. Because RRA benefits do not vest until an employee has earned five years of service credit, SMART and ARLA explain, any tax on a time lost award received prior to the vesting period would similarly fund future benefits that the employee might never receive.


In support of BNSF, the AAR contends that taxing time lost awards makes sense because railroad employees receive an RRA service credit for time-lost awards. In other words, an employee is considered to have actually worked for the amount of time lost, which in turn increases the employee’s length of service when determining the amount of RRA benefits for which the employee is eligible. The rationale for extending a service credit, the AAR explains, is because the employee would have otherwise earned the credit by actually working—and paying RRTA taxes—had the employee not been injured. The AAR thus concludes that paying tax on time lost awards is fair because the receipt of the service credit “directly enhance[s]” the employee’s future benefits.

Arguing in support of Loos, SMART and ARLA contend that holding time lost awards taxable will enable railroads to coerce employees into accepting unfair settlements. If time-lost awards are taxable under the RRTA, SMART and ARLA claim, employees would then face a “trial penalty.” Specifically, SMART and ARLA argue that railroads could coerce unfair settlements by playing up to the would-be litigant that a substantial portion of trial damages could be taxable as time lost damages, whereas in the settlement scenario, the parties could allocate a smaller portion of damages to wage loss. Finally, SMART and ARLA also question the AAR’s claim that time lost awards entitle an employee to an RRA service credit, contending that railroads grant an employee these credits only if the employee settles his or her case.

Edited by 


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