Wisconsin Central Ltd. v. United States

LII note: The U.S. Supreme Court has now decided Wisconsin Central Ltd. v. United States .


Are stock options granted by railroads to their employees taxable compensation under the Railroad Retirement Tax Act, 26 U.S.C. § 3231(e)(1)?

Oral argument: 
April 16, 2018

The Supreme Court will determine whether stock that a railroad transfers to its employees is taxable under the Railroad Retirement Tax Act (“RRTA”), 26 U.S.C. § 3231(e)(1). Petitioners Wisconsin Central Ltd. et al. (“Wisconsin Central”) argue that Congress enacted the RRTA to create a retirement program separate and distinct from the program created under the Federal Insurance Contributions Act (“FICA”). Wisconsin Central further asserts that when interpreting the RRTA as Congress intended at the time of enactment, stock transfers from railroad employers to employees were not considered as “compensation.” Finally, Wisconsin Central contends that the Court should not give weight to the exceptions added after the RRTA’s enactment in determining the original definition of “money remuneration” and that those exceptions are not rendered “surplusage” when using the medium-of-exchange definition for money. Respondent United States (“Government”) responds that Congress intended the RRTA’s tax structure to align with FICA’s—which taxes non-qualified stock options—by defining “compensation” as “any form of money remuneration,” which includes stock. The Government maintains that Congress added exceptions to the RRTA to help clarify the statute’s meaning; and, here the language indicates that “money” includes non-cash payments such as non-qualified stock options. Although Wisconsin Central and its supporters contend that stock-based compensation is a valuable form of compensation that rewards employee work, the Government worries that excluding stock from the definition of “money” will promote circumvention of the RRTA tax through strategic structuring of employee compensation plans.

Questions as Framed for the Court by the Parties 

Whether stock that a railroad transfers to its employees is taxable under the Railroad Retirement Tax Act, 26 U.S.C. § 3231(e)(1).


Wisconsin Central Limited, Grand Trunk Western Railroad Company, and Illinois Central Railroad Company (“Wisconsin Central”) are rail carriers and subsidiaries of the Canadian National Railway Company (“Canadian National”) that operate primarily in the Midwest and Mississippi Valley. Between 2006 and 2013, Wisconsin Central offered some of its stock options in Canadian National. The stock options at issue in this case are “non-qualified” stock options, meaning the Railroad Retirement Tax Act (“RRTA”) does not define the options as “qualified stock options” because Wisconsin Central did not offer the options as part of an employee stock purchase plan or as incentive stock options. The non-qualified stock options granted by Wisconsin Central allowed the recipient employees to purchase shares of Canadian National stock at a fixed price within a ten-year term. The stock options would terminate before the expiration of the ten-year term if the employee retired, died, or voluntarily left the company, or if Wisconsin Central dismissed the employee for cause. Employees could exercise some of the options granted by Wisconsin Central only if Canadian National met financial performance goals, but employees could exercise most of the granted options regardless of Canadian National’s financial performance.

Instead of paying Social Security taxes under the Federal Insurance Contributions Act (“FICA”), railroad employers and employees pay taxes under the RRTA. The RRTA taxes “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.” Although Wisconsin Central does not believe stock options constitute “money remuneration,” it treated the excess of market price over exercise price on the exercise date of these non-qualified stock options as “money remuneration,” and therefore, taxable “compensation” under the RRTA when paying its taxes. Wisconsin Central later filed a lawsuit against the Government seeking refunds of the taxes paid on the options for tax years 2006 through 2013. Both Wisconsin Central and the Government filed summary-judgment motions. The district court agreed with the Government and considered the non-qualified stock options a “form of money remuneration,” and therefore, taxable “compensation” under the RRTA.

On Wisconsin Central’s appeal, the Seventh Circuit also sided with the Government—noting that the Government’s position made “good practical sense” because it prevented employers from avoiding tax liability by strategically structuring employee compensation plans—and affirmed the district court’s decision. After the Seventh Circuit declined to rehear the case, Wisconsin Central petitioned the Supreme Court to hear the case. On January 12, 2018, the Supreme Court granted certiorari.



Wisconsin Central contends that because the Railroad Retirement Tax Act (“RRTA”) only taxes a railroad employee’s “compensation,” what was true at the time of enactment is true today: stock is not “money,” and therefore is not taxable under the RRTA. Wisconsin Central argues that the meaning of “money” at the time of the RRTA’s enactment was made clear by contemporaneous dictionaries, Supreme Court decisions, and lower court decisions: money is a “generally accepted medium of exchange.” Wisconsin Central posits that although stock is issued and involved in corporate transactions, stock is not a generally accepted medium of exchange, in part, because it is not commonly exchanged for goods or services. The RRTA’s words “any form of” money remuneration, Wisconsin Central maintains, encompass the different and evolving ways that money can be transferred—such as coins, checks, and electronic direct deposits—but does not include stock since stock does not meet the generally exchanged threshold. Wisconsin Central asserts that the Supreme Court and Tax Court have made clear that stock and money are different. Wisconsin Central contends that the IRS regulation immediately following the RRTA’s enactment purposefully excluded stock when the IRS defined “compensation” to mean money remuneration and “something which may be used in lieu of money (scrip and merchandise orders, for example),” because “scrip” in the RRTA context refers to credit to buy merchandise at the company store—not to shares in a public corporation—and because the IRS noticeably omitted stock when giving examples of compensation as “salaries, wages, commissions, fees,” and “bonuses.” The 1939 Internal Revenue Code’s multiple provisions that clearly differentiate money and stock, Wisconsin Central posits, coincide with Congress’s decision to define RRTA taxable income as “money remuneration” and not as “all remuneration” or “remuneration in money or property”—Congress believed that taxable compensation excludes stock because stock is not money.

The Government, in contrast, contends that under the RRTA, Congress intended to include non-qualified stock options (“NQSOs”) as taxable compensation. The Government notes that dictionary definitions of “money” from the 1930s often included “assets that can be easily converted to cash,” which encompasses stock. The Government argues that Congress intended that “any form of money remuneration” incorporate this definition of “money.” Even when accepting Wisconsin Central’s narrower definition of money as a “medium of exchange,” the Government posits, stocks qualify as money because stocks were used as a medium of exchange for corporate transactions and employee compensation, which is the RRTA’s focus, and are even more popularly used today. The Government asserts that during the RRTA’s enactment, the primary definition of scrip involved shares in a public company, and this meaning is what the Treasury Department intended to use in 1937 when it defined “compensation” to include “something which may be used in lieu of money (scrip and merchandise orders, for example).” The Government also observes that the U.S. Railroad Retirement Board’s (“Board’s”) 1938 regulations defined “any form of money remuneration” to include non-cash compensation with a definite cash value, and subsequent Board legal opinions specifically included stock as “money remuneration.” Congress’s approval of the Treasury and Board’s interpretation of “money remuneration,” the Government maintains, strongly indicates that “money” includes stocks.


Wisconsin Central argues that the RRTA’s tax exceptions (“RRTA exceptions”) for qualified stock options, health and disability insurance, employment achievement awards, and meals and lodging do not indicate that money remuneration includes stock. Wisconsin Central notes that the RRTA exceptions were added by Congress after the RRTA was enacted and as a result, cannot change the meaning of “compensation” absent an express repeal, which has not occurred. As a result, Wisconsin Central contends that the RRTA exceptions are irrelevant when deciding whether to include stock in the definition of money remuneration. Wisconsin Central also asserts that its proposed reading would not render the RRTA exceptions “surplusage,” because the RRTA exceptions include “payments consistent with a medium-of-exchange interpretation of money,” as they all involve cash payments, and Congress added these exceptions merely to clarify the RRTA’s application in these circumstances. The exceptions for qualified stock options (“QSOs”), Wisconsin Central argues, do not imply that non-qualified stock options (“NQSOs”) are taxable, as the Seventh Circuit held, because there are multiple circumstances where employees receiving stock options receive cash with stock options, and the exception excludes this cash from tax. Wisconsin Central also points to the history of the QSO exception, which indicates that, at the time, Congress decided QSOs to be tax-free for the Federal Insurance Contributions Act (“FICA”) and put the same provision in the RRTA merely to avoid assumptions that QSOs were taxable in the RRTA.

The Government argues that the RRTA exceptions support reading “any form of money remuneration” to include non-cash payments such as NQSOs. The Government contends that Wisconsin Central incorrectly dismisses the RRTA exceptions when considering the meaning of “money remuneration” because Congress can, as is the case here, add statutory language to clarify the meaning of older provisions. The Government maintains that it is incorrect to read the QSO exception to carve out cash payments, because although stock options can include cash payments, it is incorrect to exempt those cash payments from tax completely. Further, the Government asserts that Wisconsin Central’s narrow reading of the QSO exception’s broad language is inconsistent with the principle that each congressional amendment should be given effect, as Wisconsin Central’s reading would only reach a subset of QSOs rather than the entire category. When Congress added the QSO exception to the RRTA, the Government observes, Congress added an identical provision in FICA to except QSO-realized income from taxes entirely, and argues that there is no support that Congress placed the same provision in the RRTA with a different intent. The Government reasons that what gives the QSO exception a substantial effect is that while qualified stock options are tax-free, non-qualified stock options remain taxable. The Government contends that the other RRTA exceptions also make clear that the RRTA’s definition of “any form of money remuneration” refers to non-cash remuneration that is easily convertible into currency, because there would be no reason to make an exception but for the fact that these types of income were included as money remuneration initially.


Wisconsin Central argues that when Congress created the railroad retirement system and FICA in the same month, it used different language in the statutes to levy taxes on different tax bases. Wisconsin Central further maintains that Congress used different language in the RRTA and FICA to model the RRTA after the existing railroad private-pension structure, but started anew in designing FICA. Also, Wisconsin Central asserts that Congress’s failure to define “compensation” specifically as “any medium other than cash,” as it did for “wages” in FICA, indicates that compensation does not include stock.

The Government disagrees with Wisconsin Central’s assertion that Congress’s goal for the RRTA was to model the railroad retirement system off the preceding private pension structure. Rather, the Government contends that Congress enacted the RRTA to ameliorate the inadequate and unreliable railroad industry’s pension plans. The Government observes that the RRTA’s Tier 1 tax rates are identical to FICA’s and it would be unlikely that Congress would tax a smaller base for the RRTA when those Tier 1 rates and benefits are the same as FICA’s; thus, the Government argues that Congress intended the RRTA to conform to FICA. The Government argues that different wording in different statues can mean similar things when considering the text, history, and context—as is the case here with the RRTA and FICA tax structures.


Wisconsin Central argues that the Internal Revenue Service’s (“IRS’s”) 1994 regulation that defined “compensation” as having “the same meaning as the term wages in [FICA] . . . except as specifically limited by the [RRTA],” makes sense and respects Congress’s intentions only when considering that “compensation” in the RRTA is specifically limited to “money remuneration.” Wisconsin Central maintains, however, that the IRS’s regulation under the Government’s reading, where the RRTA has the same tax as FICA, does not warrant Chevron Deference because the RRTA statute unambiguously has a different definition for “compensation” than FICA has for “wages,” the Government’s reading would nullify Congress’s intentional use of “money” in the RRTA, and Congress purposefully created a different tax base for the RRTA than under FICA. Wisconsin Central also posits that equating RRTA taxes with FICA taxes would render useless the FICA provision 26 U.S.C. § 3121(b)(9), which excludes railroad employers and employees from paying FICA taxes.

In contrast, the Government asserts that because the Treasury wanted to satisfy Congress’s goal to conform the RRTA’s tax structure to FICA’s, the Treasury aligned the definition of “compensation” in the RRTA with “wages” in FICA. The Government argues that since Congress wanted the RRTA to align with FICA, it is reasonable to conclude that NQSOs are taxable under the RRTA because NQSOs are not taxable under FICA and there are no exceptions regarding NQSOs. The Government maintains that the “specifically limited” language in the Treasury’s regulation refer to the RRTA exceptions that do not apply to FICA. Aligning RRTA’s “compensation” definition with FICA’s “wages” definition, the Government contends, respects Congress’s use of “money” in the definition of “compensation” since the term still serves the purpose of limiting compensation to payments that are easily converted to cash. The Government argues that Wisconsin Central is incorrect in stating that aligning the RRTA with FICA would render § 3121(b)(9) useless, because that FICA provision is meant to and does prevent a taxpayer from being double taxed by the RRTA and FICA.



Wisconsin Central claims that, by enacting the RRTA, Congress intended to create a separate railroad-only pension benefits system with a tax base narrower than FICA’s tax base. Because Congress purposely designed the RRTA to have a narrower tax base, Wisconsin Central argues, Congress chose to tax “money remuneration” under the RRTA, rather than “all remuneration,” as is taxed under FICA. Furthermore, Wisconsin Central also asserts that the RRTA’s narrower tax base coincides with the RRTA’s higher tax rates. Additionally, in support of Wisconsin Central, the Association of American Railroads argues that Congress deliberately uses different language in a variety of railroad-specific statutes than in non-industry-specific statutes—including tax-related statutes—because Congress recognizes the railroad industry’s uniqueness and value to interstate commerce. Therefore, Wisconsin Central argues that a narrow definition of “money remuneration” which excludes stock options respects Congress’s decision to use different language in the RRTA than in FICA and to create a separate retirement system for railroad employees.

By contrast, the Government contends that Congress’s purpose in enacting the RRTA was to create a “financially stable and self-sustaining” pension benefits system for railroad workers to replace the previously underfunded private pension benefit system. Thus, the Government argues that reading the RRTA’s definition of “money remuneration” narrowly to exclude stock options would threaten the financial stability of the railroad pension benefits system, and therefore, the RRTA’s purpose. The Government also maintains that the increasing popularity of stock-based compensation, especially for high-level employees, increases the threat of a narrow reading of “money remuneration” to the system’s funding. Specifically, the Government asserts that excluding stock-option compensation from the meaning of “money remuneration” would exclude a growing portion of employee compensation—stock-based compensation—from the RRTA tax, which funds the railroad pension benefits system.


Supporting Wisconsin Central, the Association of American Railroads argues that employers can use stock-based compensation to “reward and incentivize employees.” Further, the Association of American Railroads maintains that Congress promotes employee stock ownership, which allows employees to be both workers and investors simultaneously. Moreover, Wisconsin Central contends that the Seventh Circuit erred in considering possible policy considerations of excluding stocks from the definition of “money remunerations” when deciding to treat stock as money because Congress, not the judiciary, should make policy determinations.

On the other hand, the Government argues that including stocks within the definition of “money” under the RRTA is necessary to prevent companies from avoiding the RRTA tax by strategically structuring employee compensation plans. Specifically, the Government contends that the large proportion of stock-option grants in executives’ and officials’ compensation packages—particularly in the railroad industry—and the popularity of using stocks in many business transactions support classifying stocks as “money.” Further supporting the inclusion of “stocks” in the definition of “money,” the Government maintains, is the ability of employees granted stock options under Wisconsin Central’s program, as well as other similar programs, to receive cash in their bank accounts upon exercising their stock options. Because employees often receive cash when exercising stock options, the Government asserts that stocks constitute “money.” Holding otherwise, the Government argues, would disregard the substance of the transaction of exercising stock options and incentivize employers to avoid paying the RRTA tax by using stock-option systems that provide a cash-deposit exercise option in lieu of other forms of compensation.

Edited by 


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