Case No. 17-530 | 7th Cir.
In Wisconsin Central the Court will confront the question of whether railroad employees are required by the Railroad Retirement Tax Act (“RRTA”) to pay taxes on stock options given by their employers.
The case began when a number of railroad company employees demanded refunds for the taxes they paid on their realized stock options, claiming that the stock options were not taxable under the RRTA. When the IRS refused to issue the refunds, the employees appealed to the Seventh Circuit. The Seventh Circuit ruled in favor of the Government and deemed the stock options taxable.
The central issue in the case is what constitutes “compensation” according to the RRTA. See 26 U.S.C. § 3201(a), (b) (2012). In the RRTA, compensation means “any form of money remuneration paid to an individual for services rendered as an employee.” § 3231(e)(1).
Petitioners contend that this definition does not reach stock options, asserting simply that “[s]tock is not money.” Brief for Petitioners at 2, Wis. Cent. Ltd. v. United States, No. 17-530 (U.S. filed Feb. 16, 2018). In response, the Government points to the numerous exceptions that the statute delineates for the definition of “compensation.” If Congress wanted stock options to be excepted from the definition, the Government argues, it would have said so explicitly, as it did with respect to a wide range of benefits, including certain stock options. See, e.g., § 3231(e)(12)(A).
The Court’s ruling in this case promises to resolve a circuit split. The Seventh Circuit’s conclusion in this case aligns with that of the Fifth Circuit, which considered the question in 2015. See BNSF Ry. Co. v. United States, 775 F.3d 743 (5th Cir. 2015). Subsequently, the Eighth Circuit took the opposite view, holding in 2017 that the stock options at issue here are not subject to taxation under the RRTA. See Union Pac. R.R. Co. v. United States, 865 F.3d 1045 (8th Cir. 2017).