CSX Corp. v. United States

United States Court of Appeals for the Federal Circuit

2007-5003, -5007

CSX CORPORATION, CSX TRANSPORTATION, INC.,
for itself and as successor by merger to The Chesapeake and Ohio Railway Company and
as successor by merger to The Baltimore and Ohio Railroad Company,
THE BALTIMORE AND OHIO CHICAGO TERMINAL RAILROAD COMPANY,
and FRUIT GROWERS EXPRESS COMPANY,

Plaintiffs-Appellants,

v.

UNITED STATES,

Defendant-Cross Appellant.

Stephen N. Shulman, Ivins, Phillips & Barker Chartered, of Washington, DC, argued
for plantiffs-appellants. With him on the brief were David W. Feeney and Burton Spivak,
Cadwalader, Wickersham & Taft LLP, of New York, New York.

Kenneth L. Greene, Attorney, Appellate Section, Tax Division, United States
Department of Justice, of Washington, DC, argued for defendant-cross appellant. With
him on the brief were Richard T. Morrison, Acting Assistant Attorney General, Gilbert S.
Rothenberg, Acting Deputy Assistant Attorney General, and Steven W. Parks, Attorney.

Appealed from: United States Court of Federal Claims

Senior Judge John P. Wiese
 United States Court of Appeals for the Federal Circuit

2007-5003,-5007

CSX CORPORATION, CSX TRANSPORTATION, INC.,
for itself and as successor by merger to The Chesapeake and Ohio Railway Company
and as successor by merger to The Baltimore and Ohio Railroad Company,
THE BALTIMORE AND OHIO CHICAGO TERMINAL RAILROAD COMPANY,
and FRUIT GROWERS EXPRESS COMPANY,

Plaintiffs-Appellants,

v.

UNITED STATES,

Defendant-Cross Appellant.

Appeal from the United States Court of Federal Claims in 95-CV-858,
Senior Judge John P. Wiese.

__________________________

DECIDED: March 6, 2008
___________________________

Before BRYSON, Circuit Judge, PLAGER, Senior Circuit Judge, and MOORE, Circuit
Judge.

BRYSON, Circuit Judge.

This federal tax case calls on us to decide whether payments made to

employees by the appellants, an affiliated group of railroad companies that we refer to

collectively as CSX, are subject to taxation under the Federal Insurance Contributions

Act (“FICA”), 26 U.S.C. §§ 3101-3128, and the Railroad Retirement Tax Act (“RRTA”),

id. §§ 3201-3241. The Court of Federal Claims, in a series of three comprehensive
opinions, held that certain of the payments at issue were subject to tax and others were

not. See 52 Fed. Cl. 208 (2002); 58 Fed. Cl. 341 (2003); 71 Fed. Cl. 630 (2006). We

conclude that all the payments at issue were subject to tax, and we therefore affirm in

part, reverse in part, and remand for further proceedings.

I

During the 1980s, CSX experienced financial difficulties of the kind that were felt

widely throughout the railroad industry. CSX sought to deal with those difficulties in part

by reducing the number of its employees. To do so, the company set up a variety of

programs, either unilaterally or through agreement with its employee unions. Those

programs featured financial arrangements that encouraged employees to separate from

the company, while cushioning the effect on employees of the company’s reduction in

the size of its workforce. The dispute in this case is over the tax consequences of those

arrangements for CSX and for the affected employees.

In broad summary, CSX’s position is that its payments to employees who were

separated from employment or who experienced reduced hours because of the

reduction in the company’s workforce were not taxable under FICA or the RRTA

because they were not “wages” for purposes of FICA, or “compensation” for purposes of

the RRTA. See 26 U.S.C. §§ 3121(a), 3231(e). The government’s position is that all of

the payments to employees and former employees under the plans in question were

“wages” or “compensation” within the meaning of FICA and the RRTA. The trial court

held that some of the payments in question constituted wages or compensation, while

others did not. Both sides have appealed the court’s judgment to this court. Both sides

agree that the term “wages” in FICA and “compensation” in the RRTA have the same

2007-5003,-5007 2
meaning for purposes of the issues in this case. See Treas. Reg. § 31.3231(e)-1(a)(1)

(“The term compensation [for purposes of the RRTA] has the same meaning as the

term wages in [FICA].”). For that reason, they have focused on the portion of the

dispute relating to FICA. The trial court did the same, and so will we.

The dispute in this case turns, to a significant degree, on the definition and tax

treatment of a type of employee benefit referred to as supplemental unemployment

compensation benefits (“SUB”). SUB benefits were first created in the 1950s as a

means for employers to supplement the state unemployment compensation benefits

received by their employees who lost their jobs as a result of workforce reductions.

Section 3402 of the income tax withholding statutes contains a subsection, 26 U.S.C.

§ 3402(o), that addresses the application of income tax withholding rules as applied to

SUB payments, among other types of benefits. That subsection defines SUB payments

as follows:

For purposes of [chapter 24 of the Internal Revenue Code, which deals
with income tax withholding], the term “supplemental unemployment
compensation benefits” means amounts which are paid to an employee,
pursuant to a plan to which the employer is a party, because of an
employee’s involuntary separation from employment (whether or not such
separation is temporary), resulting directly from a reduction in force, the
discontinuance of a plant or operation, or other similar conditions, but only
to the extent such benefits are includible in the employee’s gross income.

Id. § 3402(o)(2)(A). The same subsection then provides that a SUB payment “shall be

treated as if it were a payment of wages by an employer to an employee for a payroll

period,” and as such is subject to withholding for income tax purposes.

An important question in this case, which we address in detail below, is whether

the statement in section 3402(o) that a SUB payment “shall be treated as if it were a

payment of wages” for income tax withholding purposes necessarily implies that SUB

2007-5003,-5007 3
payments are not wages for either income tax or FICA purposes. The trial court

answered that question in the affirmative. The court inferred from the language and

legislative history of section 3402(o) that Congress regarded SUB payments, as defined

in section 3402(o), as non-wages. Applying the general rule that the term “wages” has

the same meaning for FICA as for the income tax laws, the court further concluded that

the FICA tax obligations that are imposed on payments that constitute “wages” are not

imposed on payments that fall within the definition of SUB under section 3402(o). 52

Fed. Cl. at 210-16.

Although the trial court agreed with CSX that SUB payments are not “wages” for

purposes of FICA, the court nonetheless rejected CSX’s position that all of the disputed

payments fell within the definition of SUB payments in section 3402. Instead, the court

analyzed each of the payments in dispute and held that some fell within that definition,

and thus were not “wages” for employment taxation purposes, and that others fell

outside that definition and constituted taxable “wages.” 52 Fed. Cl. at 216-21.

The first category of payments addressed by the court were those to CSX

employees who were placed into layoff status during CSX’s downsizing and were

eligible for layoff benefits during the period they were in that status. The amount of the

layoff benefit paid to each laid-off employee represented a percentage of the

employee’s average monthly compensation, and the duration of the period for which the

layoff benefit payments were made depended on each employee’s length of service.

Employees who were not willing to exercise their seniority rights to transfer to other

available positions within the plaintiffs’ system became ineligible for the continued

receipt of those benefits. The lay-off benefit payments, according to the trial court,

2007-5003,-5007 4
constituted SUB payments within the meaning of section 3402(o) and therefore were

not taxable as “wages” under FICA. 52 Fed. Cl. at 217-18.

A second category of benefit payments addressed by the trial court were those

made to employees in groups referred to as “guaranteed extraboards” and “reserve

pools.” Those were employees whose full-time positions were eliminated but who

remained subject to recall on an as-needed basis. Those employees remained on the

employer’s active service payroll and were guaranteed a certain minimum

compensation per pay period, adjusted by the amounts they were paid for work actually

performed. The court held that those payments were not SUB payments within the

meaning of section 3402(o), because those employees were not separated from

employment with the employer. As the trial court explained, “they may have been

underemployed, but they were not unemployed.” 52 Fed. Cl. at 219.

A third category of payments were those offered to non-managerial employees in

exchange for agreeing to terminate their employment. In the case of employees who

elected to receive a separation payment in lieu of layoff benefits, the trial court held that

the separation payments were SUB payments because for those employees the

separation from employment had already taken place when they were laid off. The

court explained that those employees were not electing to separate from employment,

but were simply electing “to resolve the uncertainty associated with a separation from

employment of indefinite duration (i.e., the layoff) in favor of a permanent separation.”

52 Fed. Cl. at 220. By contrast, the court held that separation payments made to

employees who accepted those payments in lieu of remaining in their existing positions

were not SUB payments, because the decision to terminate their employment was

2007-5003,-5007 5
theirs, not the employer’s, and thus the separation was not “involuntary,” as is required

by section 3402(o). Those payments constituted wages, the court held, because when

the employees relinquished their job-related benefits in favor of a lump-sum payment,

the transaction simply amounted to “a redemption, paid in cash, of wage amounts

previously paid in kind.” 52 Fed. Cl. at 221.

In a separate opinion, the trial court addressed the payments that were made to

managerial employees who were terminated in a two-phase process. 58 Fed. Cl. 341.

In the first phase, the employees were allowed to elect to separate from employment in

return for severance payments. In the second phase, the terminations were involuntary,

but they were accompanied by severance payments. The trial court held that the

payments made to managerial employees who separated as part of the first phase were

not SUB payments, because the payments were made in connection with the

employees’ voluntary decisions to terminate their employment. 58 Fed. Cl. at 346.

However, the court held that the payments made to employees who were involuntarily

separated in the second phase were SUB payments because they were made in

connection with involuntary terminations. Accordingly, the court held that the latter

payments were not wages and were not subject to FICA tax.

The trial court also addressed and rejected CSX’s argument that when the IRS

revoked a private letter ruling regarding the separation allowances paid to certain of

CSX’s management employees, the agency improperly made the revocation retroactive

to payments that had already been made to those employees. The court held that the

retroactive revocation was lawful because it correctly denied CSX a benefit that it was

not entitled to under the law. The court noted that CSX did not rely on the letter ruling,

2007-5003,-5007 6
which was issued long after CSX paid the taxes on the separation payments.

Therefore, the court concluded, revocation of the ruling left CSX in no worse position

than if the ruling had not been issued in the first place.

Based on the foregoing rulings, the trial court entered judgment for the plaintiffs

on some, but not all, of their claims. Both sides have appealed.

II

A

FICA imposes a tax on “wages” that is used to fund both social security and

medicare benefits. The tax is paid by both the employee and the employer. 26 U.S.C.

§§ 3101, 3102, 3111. Section 3121 of the Internal Revenue Code defines “wages” for

purposes of FICA to mean (with exceptions not pertinent here) “all remuneration for

employment, including the cash value of all remuneration (including benefits) paid in any

medium other than cash.” 26 U.S.C. § 3121(a). The statute defines “employment” in

pertinent part to mean “any service, of whatever nature, performed . . . by an employee

for the person employing him.” Id. § 3121(b). The Supreme Court has recognized that

those definitions are broad and that the term “service” means “not only work actually

done but the entire employer-employee relationship for which compensation is paid to

the employee by the employer.” Soc. Sec. Bd. v. Nierotko, 327 U.S. 358, 365-66

(1946).

Following Nierotko, this court has stated that the definition of wages in section

3121 of FICA encompasses “a broad range of employer-furnished remuneration in order

to accomplish the remedial purpose of the Social Security Act.” Associated Elec. Coop.,

Inc. v. United States, 226 F.3d 1322, 1326 (Fed. Cir. 2000); see also Abrahamsen v.

2007-5003,-5007 7
United States, 228 F.3d 1360, 1364 (Fed. Cir. 2000); Gerbec v. United States, 164 F.3d

1015, 1025 (6th Cir. 1999); Mayberry v. United States, 151 F.3d 855, 860 (8th Cir.

1998); Hemelt v. United States, 122 F.3d 204, 209 (4th Cir. 1997). The term “wages”

encompasses more than the amount paid for particular services rendered; as long as

the payment in question is remuneration for the overall employment relationship, it is

properly encompassed within the term “wages” under section 3121(a) of FICA. See

Abrahamsen, 228 F.3d at 1364 (remuneration for employment includes compensation

“not only for work actually performed, but also the entire employer-employee

relationship for which compensation is paid to the employee by the employer”);

Associated Elec., 226 F.3d at 1327 (same); Mayberry, 151 F.3d at 860 (same). Citing

these and other authorities, the government contends that all of the various payments in

dispute in this lawsuit qualify as “wages” under the broad definition of wages in FICA.

B

Although the government argues that the definition of wages covers each of the

payments at issue in this case, it acknowledges that not all payments made to

employees who are involuntarily terminated from their employment constitute “wages”

for purposes of FICA. In particular, the government concedes that the term “wages”

does not encompass payments of the type addressed in a 1990 IRS revenue ruling,

Rev. Rul. 90-72, 1990-2 C.B. 211. That revenue ruling stated that payments by an

employer to an employee do not constitute wages under FICA if they satisfy the

following requirements: (1) the payments are made following the involuntary separation

of the employee from the employer’s workforce, (2) the payments are designed to

supplement state unemployment benefits, (3) the payments are not made in a lump sum

2007-5003,-5007 8
but rather periodically for the duration of the former employee’s unemployment, (4) the

level of benefits depends on the employee’s seniority and is not attributable to the

rendering of any particular services, and (5) no employee has any interest in the fund

from which the benefits are paid until the employee is eligible to receive benefits from

that fund. However, except for payments that satisfy those criteria and similar criteria

set forth in an earlier revenue ruling, Rev. Rul. 56-249, 1956-1 C.B. 488, the

government contends that payments to current and former employees made in the

context of the employment relationship, including all the payments at issue in this case,

constitute “wages” within the meaning of section 3121(a) and therefore are subject to

FICA tax obligations.

The government disputes the trial court’s conclusion that payments that satisfy

the definition of SUB in section 3402(o) are not “wages” for purposes of FICA. In

particular, the government argues that Congress could not have intended to exclude all

payments falling within the definition of SUB benefits in section 3402(o) from the broad

definition of “wages” in FICA based solely on an implication from language used in

section 3402(o), a statute that is not part of FICA but deals with income tax withholding.

To appreciate the background against which this argument is made requires some

examination of the history of payments made to displaced employees, including SUB

payments, and the administrative and legislative treatment of such payments under the

tax laws.

C

Prior to 1950, the statutory definition of “wages” in FICA expressly excluded

“[d]ismissal payments which the employer is not required to make.” 26 U.S.C.

2007-5003,-5007 9
§ 1426(a)(4) (1946). Congress changed that rule in the Social Security Amendments

Act of 1950, Pub. L. No. 81-734, 64 Stat. 477, which amended FICA by eliminating the

exclusion of the so-called “dismissal payments” from FICA wages. As the House

Report explained, the amended definition of the term “wages” in FICA contained no

exclusion for dismissal payments comparable to the prior exclusion. Therefore, “a

dismissal payment, which is any payment made by an employer on account of

involuntary separation of the employee from the service of the employer, will constitute

wages . . . irrespective of whether the employer is, or is not, legally required to make

such payment.” H.R. Rep. No. 81-1300, at 124 (1950). Accordingly, as of 1950, it was

clear that all payments made by an employer on account of the involuntary separation

of an employee from service constituted wages within the meaning of FICA. See

Abrahamsen, 228 F.3d at 1364.

In the mid-1950s, several large American industrial employers adopted plans

pursuant to collective bargaining under which the employers agreed to fund trusts that

would supplement state unemployment compensation for employees who were laid off.

Those payments, denominated SUB payments, depended for their effectiveness in part

on their not being characterized as “wages.” That was because unemployment benefits

in a number of states were not available to employees who were earning “wages” from

their employers, and the employees’ loss of state unemployment benefits would largely

defeat the purpose of the supplemental unemployment benefits. Accordingly, those

who adopted such SUB plans sought to ensure that the payments from those plans

would not have the legal status of “wages.” See Joseph M. Becker, Guaranteed Income

for the Unemployed, The Story of SUB (1968); Note, Unemployment Insurance:

2007-5003,-5007 10
Supplemental Unemployment Benefit Plans, 1962 Duke L.J. 605, 609-10; see also

Coffy v. Republic Steel Co., 447 U.S. 191, 198-99 (1980). Although the payments in

question were principally designed to supplement state unemployment benefits, the

plans also commonly provided for benefits to be paid to employees in lieu of state

unemployment benefits in states in which the laid-off employees were not eligible for

state benefits. See Note, Effect of Receiving Supplemental Unemployment Benefits on

Eligibility for State Benefits, 69 Harv. L. Rev. 362, 364 (1955).

In 1956, the Internal Revenue Service issued a revenue ruling, Rev. Rul. 56-249,

1956-1 C.B. 488, in which the IRS took the position with respect to a particular SUB

plan that SUB payments under that plan would not be considered “wages” for purposes

of FICA. The 1956 revenue ruling did not purport to establish a comprehensive test for

when SUB payments would be regarded as not constituting wages, but instead set forth

a number of facts relating to the plan at issue in that case and concluded that, based on

those facts, the SUB payments under the plan in question did not constitute wages.

The revenue ruling recited the following facts as bearing on the IRS’s decision to treat

the payments as SUB payments: (1) the benefits were paid only to laid-off employees,

(2) they were paid from independent trust funds, (3) the amount of the payments was

based on the amount of the employee’s unemployment compensation benefits and the

employee’s weekly pay, (4) the benefits were not attributable to any particular service

by the employee, (5) the employee had no right to the assets of the fund until the

employee qualified for a payment from the fund, and (6) if the payment of supplemental

unemployment benefits would render the employee ineligible to receive state

unemployment compensation under a particular state’s law, the plan would pay a

2007-5003,-5007 11
substitute benefit to the employee. As the IRS subsequently explained, it was important

that the benefits not be characterized as “wages” because “[i]f the Service had made an

administrative determination that the unemployment supplements were wages, then the

supplements would have defeated the goal of a de facto guaranteed annual wage by

disqualifying employees from receiving the precise state benefits they were intended to

supplement.” I.R.S. Tech. Adv. Mem. 94-16-003, 1993 WL 642695 (Dec. 31, 1993).

In other revenue rulings issued during the next several years, the IRS ruled that

the principles of Rev. Rul. 56-249 would apply with equal force to a plan that was

unilaterally instituted by the employer rather than the product of collective bargaining

with a union. See Rev. Rul. 58-128, 1958-1 C.B. 89. The IRS also ruled that the same

principles would apply to lump sum payments rather than payments made over time.

See Rev. Rul. 59-227, 1959-2 C.B. 13. And it ruled that payments made not through a

trust, but directly from the employer to employees pursuant to a supplemental

unemployment benefit plan would also fall within the rationale of Rev. Rul. 56-249. See

Rev. Rul. 60-330, 1960-2 C.B. 46. In each of those instances, the IRS ruled that the

payments were not taxable as “wages” under FICA.

In 1960, Congress enacted an amendment to section 501(c) of the Internal

Revenue Code, 26 U.S.C. § 501(c), which provided a tax exemption for trusts that were

used as a vehicle to pay supplemental unemployment compensation benefits. Pub. L.

No. 86-667, 74 Stat. 534 (1960). In that statute, which was codified as 26 U.S.C.

§ 501(c)(17), Congress defined “supplemental unemployment compensation benefits” to

mean, in pertinent part, benefits that are paid to an employee “because of his

involuntary separation from the employment of the employer (whether or not such

2007-5003,-5007 12
separation is temporary) resulting directly from a reduction in force, the discontinuance

of a plant or operation, or other similar conditions.”

The legislative history of the 1960 statute makes clear that Congress was aware

that employers had developed SUB plans in a variety of different forms. Because

Congress wished to ensure tax-free status for a broad range of trusts that were used to

fund payments to employees who were laid off or who suffered reductions in

employment, it defined SUB benefits broadly, to include a wide range of unemployment

benefits as well as benefits for related loss of employment because of sickness or

accident. See S. Rep. No. 86-1518, at 2-3 (1960), as reprinted in 1960 U.S.C.C.A.N.

3203, 3204-05; H.R. Conf. Rep. No. 86-2073, at 4 (1960), as reprinted in 1960

U.S.C.C.A.N. 3203, 3211. As the Senate Report explained, it was desirable to extend

tax protection to trusts that provided SUB benefits because those trusts “are non-profit

in nature and provide worthwhile benefits, but at the same time are not in competition

with profitmaking enterprises.” S. Rep. No. 86-1518, at 3, as reprinted in 1960

U.S.C.C.A.N. 3203, 3205.

During the 1960s, SUB payments were treated, for income tax purposes, as

ordinary income to the recipient, but not as wages for purposes of either the income tax

withholding statutes or FICA. It soon became evident, however, that treating SUB

payments in that manner was creating a problem. Because SUB payments were not

treated as wages, income tax was not withheld from SUB payments that were made to

employees. Yet because SUB payments were included in gross income, the failure to

withhold from those payments meant that employees who received those payments

2007-5003,-5007 13
were encountering large tax obligations attributable to the SUB payments at the end of

the taxable year.

In order to solve that problem, the Treasury Department suggested an

amendment to the income tax withholding statutes (chapter 24 of the Internal Revenue

Code, entitled Collection of Income Tax at Source on Wages). The legislation would

authorize employers to withhold taxes from supplemental unemployment benefit

payments. Tax Reform Act of 1969: Hearings Before the S. Comm. On Finance, 91st

Cong. 905 (1969) (Technical Memorandum of Treasury Position on H.R. 13270). In

response to that recommendation, Congress enacted section 3402(o) as a part of the

Tax Reform Act of 1969. The new provision ensured that SUB payments, even if not

deemed “wages,” would be subject to income tax withholding by the employer. Section

3402(o) thus provided that any supplemental unemployment compensation benefit paid

to an individual “shall be treated as if it were a payment of wages by an employer to an

employee for a payroll period.” 26 U.S.C. § 3402(o).

Section 3402(o) took its definition of supplemental unemployment compensation

benefits almost verbatim from the 1960 tax exemption statute, section 501(c)(17). At

the time of the enactment of section 3402(o), the Senate Committee report recognized

that SUB payments were not subject to withholding for income tax purposes “because

they do not constitute wages or remuneration for services.” S. Rep. No. 91-552, at 268

(1969), as reprinted in 1969 U.S.C.C.A.N. 2027, 2305. Congress did not legislate to

make them wages. Instead, as the Senate Report explained, it provided that “although

these benefits are not wages . . . they should be subject to withholding to avoid the final

tax payment problem for employees.” Id. Accordingly, the report concluded, the

2007-5003,-5007 14
withholding requirements “applicable to withholding on wages are to apply to these non-

wage payments.” Id. at 269, 1969 U.S.C.C.A.N. at 2306.

During the period between 1965 and 1974, the IRS issued a series of revenue

rulings in which it reiterated the longstanding principle that dismissal payments

constitute wages. In the first, Rev. Rul. 65-251, 1965-2 C.B. 395, the IRS ruled that

lump sum separation and severance allowances paid to laid-off employees in the

railroad industry constituted “compensation” under the RRTA. In Rev. Rul. 71-408,

1971-2 C.B. 340, the IRS addressed an agreement between a union and a company

under which the company undertook to make awards to employees when the

employees were separated because of a termination of service. The amount of the

awards was based on the employees’ rate of pay and years of service. Citing the 1950

amendment to the Social Security Act and the “dismissal payment” regulation in the

income tax withholding regulations, 1 the IRS ruled that those payments constituted

“wages” under FICA. Three years later, the IRS reached the same conclusion with

respect to a dismissal payment that was the product of a contractual arrangement

between the employer and the employee to make dismissal payments if the employer

terminated the employee early. Rev. Rul. 74-252, 1974-1 C.B. 287. Those three

revenue rulings made no reference to the statutes pertaining to SUB payments.

In 1977, the IRS issued a revenue ruling dealing with SUB payments in the

aftermath of the enactment of section 3402(o). That ruling, Rev. Rul. 77-347, 1977-2

1
See Treas. Reg. § 31.3401(a)-1(b)(4) (“Any payments made by an employer
to an employee on account of dismissal, that is, involuntary separation from the service
of the employer, constitute wages regardless of whether the employer is legally bound
by contract, statute, or otherwise to make such payments.”).

2007-5003,-5007 15
C.B. 362, noted that the employer’s plan at issue in that case was “substantially the

same” as the plan that had been at issue in Rev. Rul. 56-249. 1977-2 C.B. at 363.

Although the plan at issue was not directly tied to the receipt of state unemployment

compensation benefits, the revenue ruling pointed out that payments under the plan did

not disqualify the employees from receiving state unemployment benefits. The revenue

ruling then made two findings with respect to the plan at issue. First, it found that

because “the supplemental unemployment plan in Rev. Rul. 56-249 and the plan in the

instant case are substantially the same, the fact that benefits under the plan are not tied

to the State’s unemployment benefits is not a material or controlling factor.” 1977-2

C.B. at 363. Second, the revenue ruling found that “[t]he payments under both plans

are supplemental unemployment compensation benefits as defined in section 3402(o)

of the Code.” Id. Based on those two findings, the revenue ruling drew two legal

conclusions:

Accordingly, the payments from the trust received by the former
employees are not “wages” for the purposes of the Federal Insurance
Contributions Act and the Federal Unemployment Tax Act. Further, the
payments are includible in the gross incomes of the recipients for the year
in which received, and are subject to the Collection of Income Tax at
Source on Wages.

Id. The revenue ruling concluded by noting that the IRS was modifying the 1956

revenue ruling “to reflect the change of the Code made by the Tax Reform Act of 1969

with regard to the Collection of Income Tax at Source on Wages.” Id.

Although CSX characterizes the 1977 revenue ruling as expressly supporting its

position that SUB payments, as defined in section 3402(o), are not wages for purposes

of FICA, the revenue ruling does not clearly embrace that position. To the contrary, the

first legal conclusion in the revenue ruling—that the payments from the trust are not

2007-5003,-5007 16
“wages” for FICA purposes—may be viewed as flowing from the finding that the plan at

issue was “substantially the same” as the plan in Rev. Rul. 56-249, while the second

legal conclusion—that the payments are includible in the employees’ gross income and

are subject to withholding under the provisions of chapter 24—may be viewed as

flowing from the finding that the payments under both plans fall within the scope of

section 3402(o).

The IRS subsequently embraced that interpretation of Rev. Rul. 77-347. It

explained that although the plan at issue in the 1977 revenue ruling did not link the plan

benefits to state unemployment compensation, the 1977 revenue ruling nonetheless

emphasized that the plan benefits did not disqualify the employee from the state

unemployment benefits. I.R.S. Tech. Adv. Mem. 94-16-003, 1993 WL 642695. The

IRS further noted that 1977 revenue ruling described the plan in that case as

“‘substantially the same’ as the plan in Rev. Rul. 56-249.” Id. at 4, For that reason, the

IRS concluded, the plan in Rev. Rul. 77-347 qualified as a SUB plan for FICA purposes,

justifying the exclusion of plan benefits from “wages” under FICA.

If the 1977 revenue ruling were read as broadly as CSX contends, it would be

difficult to reconcile with the 1965, 1971, and 1974 revenue rulings dealing with

dismissal payments. The 1965, 1971, and 1974 rulings treated payments made by an

employer in response to an involuntary termination (lay-offs in the case of the 1965

ruling, cessation of operations in the case of the 1971 ruling, and early termination of

contract work in the case of the 1974 ruling) as dismissal payments and thus as

“wages” for purposes of FICA. The 1977 ruling treated payments by a collectively

bargained trust to employees separated because of permanent discontinuance of the

2007-5003,-5007 17
company’s business or acquisition, merger, or consolidation as SUB payments for

purposes of income tax withholding. If the 1977 revenue ruling stood for the proposition

that all payments fitting the definition of SUB under section 3402(o) are deemed non-

wages for purposes of FICA, as CSX contends, the 1965, 1971, and 1974 revenue

rulings would appear to have been silently overruled. Rather than interpret the 1977

revenue ruling to have such a dramatic (but unannounced or unrecognized) effect, we

think the 1977 revenue ruling is better interpreted to have the more modest effect of

announcing that payments under a plan satisfying the definition of SUB in section

3402(o)(2)(A) are subject to income tax withholding, and payments under a plan having

similar characteristics to the one in Rev. Rul. 56-249 are not subject to taxation under

FICA.

CSX seeks to distinguish “dismissal” payments (which are wages for FICA

purposes) from SUB payments under section 3402(o) (which it contends are not wages)

on the ground that the SUB payments must result “from a reduction in force, the

discontinuance of a plant or operation, or other similar conditions.” That distinction is of

no help here, however, because it is beyond dispute that the payments in this case

resulted from a reduction in CSX’s workforce. Nor would the distinction be of use in the

large number of cases involving “buy-out” and “severance” payments accompanying

force reductions or plant closings. See, e.g., Rev. Rul. 71-408, 1971-2 C.B. 340

(payments made to separated employees when company terminated operations were

“dismissal” payments and thus “wages” for purposes of FICA). In this and like cases,

CSX’s argument regarding the 1977 revenue ruling would result in identical payments

2007-5003,-5007 18
being subject to different tax treatment depending on how the payments were

characterized.

During the years between 1977 and 1990, the IRS issued a number of private

letter rulings in which it approved various SUB plans, authorizing the employers to treat

the SUB payments under those plans as non-wages. In explaining its reasoning in

those rulings, the IRS did not suggest that the SUB payments were not taxable under

FICA merely because they satisfied section 3402(o). In fact, in several of the rulings,

the IRS stated separately (1) that the SUB payments at issue were not taxable under

FICA because the SUB plans at issue were similar to the plan in Rev. Rul. 56-249, and

(2) that the SUB payments were subject to income tax withholding because they

satisfied the definition in section 3402(o). 2 Those private letter rulings therefore do not

support CSX’s characterization of the 1977 revenue ruling as adopting CSX’s theory

that the definition of SUB in section 3402(o) governed the issue of FICA taxation.

In 1989, the IRS announced that it would not issue any more private letter rulings

dealing with whether SUB payments constituted wages pending further review of the

issue. Rev. Proc. 89-7, 1989-1 C.B. 778. The following year, the IRS issued Rev. Rul.

90-72, 1990-2 C.B. 211, in which it set forth in detail its position as to the relationship

between supplemental unemployment benefit payments that do not constitute wages

under IRS revenue rulings and SUB benefits as defined by section 3402(o). In that

2
See I.R.S. Priv. Ltr. Rul. 78-17-073 (Jan. 27, 1978); I.R.S. Priv. Ltr. Rul. 78-
33-039 (May 17, 1978); I.R.S. Priv. Ltr. Rul. 78-45-039 (Aug. 10, 1978); I.R.S. Priv. Ltr.
Rul. 79-16-044 (Jan. 17, 1979); I.R.S. Priv. Ltr. Rul. 79-39-120 (June 29, 1979); I.R.S.
Priv. Ltr. Rul. 80-06-053 (Nov. 16, 1979); I.R.S. Priv. Ltr. Rul. 85-01-073 (Oct. 11, 1984);
I.R.S. Priv. Ltr. Rul. 85-03-023 (Oct. 17, 1984); I.R.S. Priv. Ltr. Rul. 86-03-127 (Oct. 25,
1985); I.R.S. Priv. Ltr. Rul. 86-50-048 (Sept. 16, 1986); I.R.S. Priv. Ltr. Rul. 87-32-015
(May 7, 1987).

2007-5003,-5007 19
revenue ruling, the IRS stated that the definition of SUB payments in section 3402(o) is

not applicable to FICA, and that for FICA purposes supplemental unemployment

benefits are defined “solely through a series of administrative pronouncements

published by the Service.” 1990-2 C.B. at 211-12. Citing the 1950 legislation that

extended FICA to “dismissal payments” as well as the Treasury regulation providing that

“dismissal payments” constitute wages for income tax withholding purposes, Treas.

Reg. § 31.3401(a)-1(b)(4), the IRS stated that in order to be exempt from inclusion

within the definition of “wages” under FICA, payments made to employees involuntarily

separated from the service of the employer had to be “designed to supplement the

receipt of state unemployment compensation.” 1990-2 C.B. at 212. The IRS further

explained that because lump-sum benefits, rather than periodic payments, allow the

same amount of benefits to be received no matter how long the individual remains

unemployed, “benefits provided in the form of a lump sum are not considered linked to

state unemployment compensation . . . and are therefore not excludable from wages as

SUB pay.” Id. The IRS characterized Rev. Rul. 90-72 as “restor[ing] the distinction

between SUB pay and dismissal pay by re-establishing the link between SUB pay and

state unemployment compensation” originally established in Rev. Rul. 56-249. 1990-2

C.B. at 213. As such, the 1990 revenue ruling stated that it was modifying the 1977

revenue ruling to the extent that the earlier ruling had allowed payments to qualify as

SUB for purposes of FICA even when the payments were not tied to eligibility for state

unemployment compensation.

2007-5003,-5007 20
 D

The government urges us to embrace the position taken in IRS Rev. Rul. 90-72

that SUB payments are excluded from wages only when the plans in question are

substantially similar to the plans reviewed in Rev. Rul. 56-249 and subsequent related

rulings. The trial court rejected the government’s argument. The court’s analysis,

embraced by CSX, consisted of two steps. First, the court ruled that the provision of

section 3402(o) that states that a SUB benefit “shall be treated as if it were a payment

of wages by an employer to an employee for a payroll period” implies that such a benefit

is not “wages” for purposes of the income tax withholding statutes. Second, the court

ruled that if a particular payment is not “wages” for purposes of the income tax

withholding statutes, it must not be “wages” for purposes of FICA. Hence, the court

concluded that SUB benefits, as defined in section 3402(o)(2)(A), are not wages under

FICA and thus are not subject to taxation under that statute.

We acknowledge that this issue of statutory construction is complex and that the

correct resolution of the issue is far from obvious. Indeed, the trial court’s lucid analysis

of the issue has substantial force. Nonetheless, after careful consideration we are

constrained to disagree with the trial court and with CSX with regard to the proper

construction of section 3402(o) as it relates to FICA.

Section 3402(o) had the effect of including SUB payments in the types of income

(including conventional wages) that are subject to income tax withholding. For

purposes of chapter 24 (income tax withholding), it was not important for Congress to

define SUB payments narrowly or to distinguish between SUB payments and “dismissal”

payments, since both were treated similarly for withholding purposes. For the same

2007-5003,-5007 21
reason, it is not surprising that the income tax withholding regulations have long

contained co-existing provisions stating that dismissal payments and SUB payments (as

defined in section 3402(o)) are subject to withholding, even though those two categories

plainly overlap. Compare Treas. Reg. § 31.3401(a)-1(b)(4) (defining dismissal

payments as “[a]ny payments made by an employer to an employee on account of

dismissal, that is, involuntary separation from the service of the employer”), with id.

§ 31.3401(a)-1(b)(14)(ii) (defining supplemental unemployment compensation benefits

as “amounts which are paid to an employee pursuant to a plan to which the employer is

a party, because of the employee’s involuntary separation from the employment of the

employer, whether or not such separation is temporary, but only when such separation

is one resulting directly from a reduction in force, the discontinuance of a plant or

operation, or other similar conditions”). Under those regulations, not all dismissal

payments would constitute SUB payments, but all SUB payments would qualify as

dismissal payments. Yet the overlap between those two categories has presented no

difficulties in the context of chapter 24, because the same consequence ensues—

withholding—regardless of which category a particular payment is deemed to fall within.

The overlap between those two categories does cause problems, however, if

section 3402(o) is construed to apply outside of chapter 24, such as to chapter 21

(FICA), chapter 22 (the RRTA), and chapter 23 (the Federal Unemployment Tax Act.

Thus, if section 3402(o) is deemed to render all SUB payments (as defined therein)

non-wages, and if the non-wage character of SUB payments (as so defined) is deemed

to apply to FICA, it creates a square conflict with the treatment of dismissal payments

as wages under FICA since 1950 and in decisions of this court and others. See

2007-5003,-5007 22
Abrahamsen v. United States, 228 F.3d 1360 (Fed. Cir. 2000); Greenwald v. United

States, 2000 WL 16939 (S.D.N.Y. Jan. 10, 2000); McCorkill v. United States, 32 F.

Supp. 2d 46 (D. Conn. 1999); Meehan v. Comm’r, 122 T.C. 396 (2004). That potential

conflict argues against reading section 3402(o) to suggest that all payments falling

within the statutory definition of SUB must be deemed non-wages for FICA purposes.

Nothing in the text of section 3402(o) requires that the statute be read to go that

far. Section 3402(o)(1) provides that the general rule that SUB payments shall be

treated as if they were payments of wages applies only for purposes of chapter 24 and

certain procedural provisions relating to chapter 24. Congress’s decision to restrict the

scope of the rule set forth in section 3402(o) to chapter 24 suggests that Congress did

not intend that rule, or any implication that might be drawn from that rule, to be applied

outside the context of income tax withholding.

Limiting the rule of section 3402(o) to the context of income tax withholding

makes sense in light of the purpose served by that provision. As noted above, because

section 3402(o) resulted in adding SUB payments to other payments that were subject

to withholding, it was not important to distinguish between SUB payments that

constituted wages (such as dismissal payments) and those that did not (such as

payments covered by Rev. Rul. 56-249). Similarly, because Congress wished to ensure

that trusts used for making SUB payments would be able to operate tax-free, defining

SUB payments broadly for purposes of section 501(c)(17) had the effect of avoiding

disputes over whether particular trusts qualified as SUB trusts. Congress’s subsequent

decision to apply the section 501 definition of SUB for purposes of section 3402(o) did

not affect the status of those payments as gross income, and it assured that the

2007-5003,-5007 23
statutory definition would not be the source of disputes over whether such payments

would be subject to withholding on the same basis as wages.

CSX argues that even though the rule governing the treatment of SUB payments

as defined in section 3402(o)(2)(A) is expressly limited to chapter 24, the implication of

that rule cannot be so confined. Thus, while the definition of SUB in section 3402(o) is

not directly applicable to FICA, CSX argues that the section 3402(o) definition applies to

FICA through a more indirect route. CSX’s reasoning goes as follows: Because section

3402(o) provides that SUB payments “shall be treated as if they were wages,” they must

not be wages for purposes of the definition of wages in section 3401. If SUB payments

are not wages for purposes of section 3401, they cannot be wages for purposes of

section 3121 (FICA).

1

As to the first proposition, the statement that a SUB payment, as defined in

section 3402(o), “shall be treated as if it were a payment of wages by an employer to an

employee for a payroll period” does not imply that all payments satisfying the definition

of SUB in section 3402(o)(2)(A) are non-wages, even for purposes of chapter 24. It is

undisputed that some SUB payments—in particular, those described in Rev. Rul. 90-72

and Rev. Rul. 56-249—are not wages. CSX argues that saying that all SUB payments

within the definition of section 3402(o) must be “treated as if” they were payments of

wages necessarily implies that no such payments are in fact wages.

We disagree. To say that all payments falling within a particular category shall

be treated as if they were a payment of wages does not dictate, as a matter of language

or logic, that none of the payments within that category would otherwise be wages. For

2007-5003,-5007 24
example, to say that for some purposes all men shall be treated as if they were six feet

tall does not imply that no men are six feet tall. Moreover, section 3402(o) does not

simply say that SUB payments shall be treated as wages; it provides that SUB

payments shall be treated as if they were “a payment of wages by an employer to an

employee for a payroll period.” To say that certain payments do not constitute a

payment of wages for a payroll period falls short of saying that the payments lack the

legal character of “wages” altogether. In sum, the inference that CSX seeks to draw

from the statutory language is simply too strained. Thus, while some supplemental

unemployment benefit payments do not constitute “wages,” it does not follow that all

payments fitting within the broad definition of SUB in section 3402(o)(2)(A) are non-

wages. 3 We therefore conclude that the text of section 3402(o) does not require that

FICA be interpreted to exclude from “wages” all payments that would satisfy the

definition of SUB in section 3402(o)(2)(A).

2

CSX’s second proposition—that the term “wages” must be interpreted to mean

the same thing in FICA as it does in the income tax withholding statutes—is based

principally on the Supreme Court’s decision in Rowan Companies v. United States, 452

U.S. 347 (1982). In that case, the Court concluded that in light of the parallel language

3
The same point applies to CSX’s argument that the heading of section
3402(o), “Extension of withholding to certain payments other than wages,” implies that
all the payments encompassed within that subsection are non-wages. The point of the
subsection is to extend withholding to certain payments not previously covered, i.e.,
non-wages. The fact that the subsection contains a definitional provision that includes
some payments that would already be covered as wages does not belie the heading of
the subsection or require that all of the payments covered by the subsection be
converted into non-wages.

2007-5003,-5007 25
of the two definitional sections, Congress can be assumed to have intended the

definition of “wages” in FICA to be the same as the definition of “wages” in the income-

tax withholding statutes. The specific holding of the Court in Rowan was that certain

Treasury Department regulations that interpreted the term “wages” differently for

purposes of income tax withholding and FICA were invalid. The Rowan Court noted the

congressional purpose of coordinating the income tax withholding system with FICA,

and explained that contradictory interpretations of the same term in the two statutes

would not serve that interest: “It would be extraordinary for a Congress pursuing this

interest to intend, without ever saying so, for identical definitions to be interpreted

differently.” 452 U.S. at 257. Based on Rowan, the trial court concluded that the term

“wages” must be accorded the same meaning in both the income tax statutes and in

FICA.

The government argues that Congress has rejected the principle that the term

“wages” must be interpreted in pari materia in the income tax withholding statutes and in

FICA. In particular, the government contends that in 1983 Congress legislatively

overruled Rowan and “decoupled” FICA and the income tax statutes in that respect.

The statute on which the government relies is a provision from the Social Security

Amendments of 1983, Pub. L. No. 98-21, 97 Stat. 65, a massive piece of legislation

designed to implement reforms to the social security system recommended by the

National Commission on Social Security Reform. The particular legislative change on

which the government relies was designed to address the Supreme Court’s decision in

Rowan. The change, which was introduced in the late stages of the preparation of the

bill, was described in the committee reports as having two purposes. First, it was

2007-5003,-5007 26
intended to codify the specific holding of Rowan, that the value of meals and lodging

furnished to an employee for the convenience of the employer does not constitute

wages for FICA and income tax purposes. At the same time, it was intended to disavow

the broader principle of Rowan, that the term wages for income tax purposes must be

interpreted in the same manner as the term wages for purposes of FICA.

The committee reports on the 1983 statute clearly state that the amendment was

designed to ensure that the rules applicable to income tax withholding would not

necessarily apply equally to FICA. Both the House and Senate committees, noting the

difference between the social security system and the income tax system, explained

that the purpose of the bill was to ensure that the determination of whether payments

are included within “wages” for FICA purposes would not be dictated by whether the

same payments would be treated as “wages” for income tax purposes:

The social security program aims to replace the income of beneficiaries
when that income is reduced on account of retirement and disability.
Thus, the amount of “wages” is the measure used both to define income
which should be replaced and to compute FICA tax liability. Since the
security system has objectives which are significantly different from the
objective underlying the income tax withholding rules, the committee
believes that amounts exempt from income tax withholding should not be
exempt from FICA unless Congress provides an explicit FICA tax
exclusion.

[The bill] provides that, with the exception of the value of meals and
lodging provided for the convenience of the employer, the determination
whether or not amounts are includible in the social security wage base is
to be made without regard to whether such amounts are treated as wages
for income tax withholding purposes. Accordingly, an employee’s “wages”
for social security tax purposes may be different from the employee’s
“wages” for income tax withholding purposes.

S. Rep. No. 98-23, at 42 (1983), as reprinted in 1983-2 U.S.C.C.A.N. 183; H.R. Rep.

No. 98-25, at 80 (1983), as reprinted in 1983-2 U.S.C.C.A.N. 299; see also H.R. Conf.

2007-5003,-5007 27
Rep. No. 98-47, at 148 (1983), as reprinted in 1983-2 U.S.C.C.A.N. 438 (“the

determination of whether or not amounts are includible in the social security wage base

is to be made without regard to whether such amounts are treated as wages for income

tax withholding purposes”); John A. Svahn and Mary Ross, Social Security

Amendments of 1983: Legislative History and Summary of Provisions, 46 Soc. Sec.

Bull. No. 7, at 13 (July 1983) (observation by the Commissioner of Social Security that

the amendment addressing Rowan “provides a clear statutory precedent for different

treatment of the same income for Internal Revenue Service and Social Security

purposes”).

The problem is that, although the committee reports clearly state the intention to

decouple the term “wages” for purposes of income tax withholding and FICA, the

statutory language does not have that effect. The pertinent language, which was added

to section 3121 of FICA (and later to the corresponding section of the RRTA, Pub. L.

No. 101-239, § 10207(b), 103 Stat. 2476 (1989)), reads as follows:

Nothing in the regulations prescribed for purposes of chapter 24 (relating
to income tax withholding) which provides an exclusion from “wages” as
used in such chapter shall be construed to require a similar exclusion from
“wages” in the regulations prescribed for purposes of this chapter.

26 U.S.C. § 3121(a). That language addresses the construction of the regulations

rather than chapter 24 itself; as CSX points out, it does not state that the term “wages”

in section 3401 will be defined independently from the term “wages” in section 3121.

Moreover, this court in Anderson v. United States, 929 F.2d 648 (Fed. Cir. 1991),

rejected the same argument that the government is making here. In that case, the court

held that the term “including benefits” in the definition of wages under FICA must be

accorded the same meaning as the identical term used in the income tax statutes. In

2007-5003,-5007 28
the course of its opinion, the court rejected the government’s argument that the 1983

amendment to section 3121 had the effect of decoupling the meaning of “wages” in

FICA from the meaning of the same term in the income tax withholding statutes. The

court explained that the statute “decoupled” the two only to the extent of “allowing

Treasury to promulgate regulations to provide for different exclusions from ‘wages’

under FICA than under the income tax withholding laws.” 929 F.2d at 650; see also id.

at 653 n.10 (“The SSA amendment provided for treating ‘wages’ in both statutes

differently, but only through exclusions promulgated by regulation.”). The court noted

that there was “no regulation pointed to which indicates that any different effect is to be

attributed to ‘(including benefits)’ as between the FICA and income tax withholding

statutes.” Id. Accordingly, the court concluded that it was “constrained to interpret the

‘(including benefits)’ language” in the same fashion in both statutes. Id. 4

In light of the lack of congruence between the legislative history and the statutory

text of the 1983 amendment, and this court’s rejection of the government’s “decoupling”

argument in Anderson, we disagree with the government’s argument that after 1983, the

term “wages” in FICA must be interpreted without reference to the same term in the

income tax withholding statutes. However, because we have rejected the first part of

4
The government cites the recent Supreme Court decision in Environmental
Defense v. Duke Energy Corp., 127 S. Ct. 1423 (2007), in support of its argument. In
that case, the Court discussed Rowan and explained that Rowan relied on a manifest
“congressional concern for the interest of simplicity and ease of administration.” Duke
Energy, 127 S. Ct. at 1433, quoting Rowan, 452 U.S. at 255. While that concern may
be less compelling in other statutory settings, such as the one at issue in the Duke
Energy case, there is nothing in the Court’s opinion in that case to suggest that it would
take a different view of the relationship between chapter 24 and chapter 21 of the
Internal Revenue Code, where the Rowan Court found an enhanced need for
consistency.

2007-5003,-5007 29
CSX’s argument—that the reference to the term “wages” in section 3402(o) necessarily

implies that all payments falling within the definition of SUB in that subsection are non-

wages, we reject CSX’s statutory argument. Based on that analysis, we disagree with

the trial court’s conclusion that all payments that qualify as SUB under the statutory

definition in section 3402(o)(2)(A) are non-wages for purposes of FICA. We therefore

reverse those portions of the trial court’s judgment that were based on the trial court’s

adoption of that theory of the case.

CSX has not argued that, apart from the application of section 3402(o), its

payments would satisfy the IRS’s administrative exclusion of SUB benefits from wages

under Rev. Rul. 90-72 and its predecessors, as the IRS has construed and applied

those rulings. Moreover, the government stated both in briefing and in oral argument

that CSX has not contended that any of the payments at issue in this case would qualify

for exemption from employment taxes under the governing IRS revenue rulings going

back to Rev. Rul. 56-249, and CSX has not contradicted the government’s assertion.

We therefore conclude that CSX has failed to establish that its payments were free from

FICA and RRTA taxation on the ground that they constituted qualifying supplemental

unemployment benefits.

III

Apart from its principal contention that section 3402(o) dictates that all SUB

payments under that section are non-wages, CSX raises several independent

arguments in support of its contention that the particular classes of payments among

those at issue in this case are not wages for purposes of FICA and are not

compensation for purposes of the RRTA. First, CSX argues that the separation

2007-5003,-5007 30
allowances it made to unionized employees in connection with its workforce reductions

were not “remuneration for employment,” 26 U.S.C. § 3121(a) (FICA), or “money

remuneration paid to an individual for services rendered as an employee,” id.

§ 3231(e)(1) (RRTA), and therefore were not taxable under either regime.

The separation allowances consisted of lump sum payments made to employees

who agreed to leave their jobs. The separation payments were not wages, according to

CSX, because the payments “had their origins in the cessation, not the performance, of

services.” CSX distinguishes several of the cases relied on by the government to argue

that such payments constitute wages, on the ground that in those cases the amount of

the payments was tied to factors such as the employees’ rate of pay and length of

service with the employer, whereas the amounts of the separation allowances in this

case were negotiated for each class of employees without regard to the circumstances

of each individual employee’s service to the company.

Relying on the Supreme Court’s decision in Central Illinois Public Service Co. v.

United States, 435 U.S. 21, 29 (1978), CSX argues that the mere fact that payments are

made “in the context of the employer-employee relationship” does not dictate that they

be considered wages. That case involved the question whether lunch reimbursements

constituted wages; the Court held that they did not. In reaching that conclusion, the

Court relied heavily on the fact that for many years after the creation of the withholding

system in 1942, no Treasury regulations or IRS revenue rulings had treated meal

reimbursements as wages. See id. at 32.

By contrast to the reimbursements involved in Central Illinois Public Service Co.

and several other cases on which CSX relies, this case involves dismissal payments.

2007-5003,-5007 31
As discussed above, it has been clear since the 1950 amendment to FICA that

dismissal payments occasioned by involuntary separations constitute wages under

FICA. A Treasury regulation under chapter 24 expressly so provides. Treas. Reg.

§ 31.3401(a)-1(b)(4). Although CSX argues that the rule that “dismissal” payments

constitute wages should be limited to payments made in the case of involuntary

dismissals, both precedent and policy indicate otherwise. 5 In particular, this court has

held that dismissal or severance payments constitute wages regardless of whether the

employee’s separation is considered voluntary or involuntary. See Abrahamsen, 228

F.3d at 1361, 1364; see also Agar v. Comm’r, 290 F.2d 283, 284 (2d Cir. 1961). That

rule reflects the IRS’s administrative practice. See Rev. Rul. 75-44, 1975-1 C.B. 15

(lump sum payment received as consideration for employee’s relinquishment of his

employment rights is subject to employment tax); I.R.S. Tech. Adv. Mem. 97-17-001, at

*14, 1997 WL 200902 (1997) (“an ordinary severance payment . . . is wages for

employment tax purposes”); I.R.S. Priv. Ltr. Rul. 83-44-037 (July 29, 1983) (severance

payment that does not satisfy a statutory exception under section 3121 constitutes

“wages”); Dep’t of the Treasury, FICA Taxation of Amounts Under Employee Benefit

Plans, 61 Fed. Reg. 2194, 2196 (Jan. 25, 1996) (proposed regulations referring to “the

long-established FICA tax treatment” of severance pay). It also makes good sense as a

policy matter, because the question whether a particular payment constitutes “wages”

depends on the reason for the payment, and the reason the payment is made does not

5
We note that there is some tension between CSX’s argument that “dismissal”
payments include only payments made pursuant to involuntary separations, and its
argument for purposes of section 3402(o) that all of the separations in this case were
involuntary.

2007-5003,-5007 32
depend on whether the options before the employee are such that he feels free to

accept or decline the payment, feels that he has little choice but to accept it, or feels

that his situation is somewhere in between those extremes. See Note, The Wages of

Not Working: FICA Liability for Severance Payments in Associated Electric Cooperative,

Inc. v. United States, 54 Tax Law. 811, 818-19 (2001) (approving same treatment for

voluntary and involuntary dismissal payments; “[a]s in other cases of severance

payments, the taxpayer offered a voluntary severance plan for the same reason as it

offered an involuntary severance plan: to reduce its workforce consistent with its

changing labor needs.”).

CSX argues that the separation payments held to be “wages” in Abrahamsen

and Associated Electric Cooperative, Inc., 226 F.3d 1322 (Fed. Cir. 2000), can be

distinguished from the separation allowances at issue in this case, because in both

Abrahamsen and Associated Electric the amount of the payments was based in part on

each employee’s rate of pay and length of service with the employer, which is not true

of the separation allowances in this case. Yet, while it is true that in both Abrahamsen

and Associated Electric the amount of the severance payments at issue were based in

part on the departing employees’ salary and years of service, in neither case did the

court treat that fact as controlling. Instead, those cases treated that fact as further

support for the conclusion that the payments at issue were wages.

Moreover, in Abrahamsen the court looked at the method of determining the

amount of the severance payment in question because it was addressing an argument

that CSX has not made here. The plaintiffs in Abrahamsen argued that the severance

payments were not wages because they were made for the purpose of settling potential

2007-5003,-5007 33
personal injury lawsuits. Id. at 1364. The court rejected their argument, however,

because there was no evidence in the record that the employees had ever made any

personal injury claims against IBM or informed IBM of any claims that they might assert.

Id. at 1365. The court further supported its conclusion that the payments were wages,

and not payments for the settlement of claims, by noting that the payment amounts

were based on the departing employees’ salary and years of service. Id. In drawing the

distinction between wages and settlement payments, the court relied on two cases from

other circuits that examined awards paid to former employees as part of a settlement

agreement for a class action suit under ERISA, and found those awards to be wages.

Mayberry v. United States, 151 F.3d 855 (8th Cir. 1998), and Hemelt v. United States,

122 F.3d 204 (4th Cir. 1997). In Hemelt, the Fourth Circuit stated that the method of

calculating the settlement awards supported the conclusion that the settlement awards

were wages rather than “tort-based awards” because the amount of payments were

based on the former employees’ salary and length of service. 122 F.3d at 210.

Following Hemelt, the Eighth Circuit in Mayberry rejected the plaintiffs’ argument that

the settlement awards were not wages because the class members had already been

fully compensated for all services rendered. 151 F.3d at 860.

In Associated Electric, the court relied on Mayberry and Hemelt for the

proposition that the method of calculating the “early out” payments at issue was “a

relevant factor in determining whether the payments constitute ‘wages.’” 226 F.3d at

1328. The court additionally relied on the holding in Lane Processing Trust v. United

States, 25 F.3d 662, 664 (8th Cir. 1994), which rejected the plaintiffs’ argument that the

distribution of funds to employees from a company trust was a distribution of the

2007-5003,-5007 34
employees’ ownership interest in the fund rather than a payment of wages. Because

each employee’s distribution was based on the employee’s job and length of

employment, the court rejected the argument that “the distributions were the fruits of

ownership.” Id. at 665. As shown by Abrahamsen, Associated Electric, and the

opinions on which those two cases relied, the structure of payments to employees can

be useful in determining whether those payments are wages, or whether they should be

considered something other than wages. In this case, however, CSX does not assert

that the separation allowances to the unionized employees were anything other than

payments to encourage the employees to end their employment relationship with the

company.

CSX has asserted that the method of calculating the payments alone weighs

against finding the payments to be wages. As explained above, the method of

calculating payments can be a useful factor in determining whether the payments

should be characterized as something other than wages. CSX, however, has not

explained why severance payments that are intended to induce employees to give up

their employment rights must reflect the employees’ prior service and salary in order to

constitute wages. Indeed, this court and others have found severance payments to be

wages when the payments were offered primarily to induce an employee to leave his

employment. In Abrahamsen, the court noted that the exit-incentive payments that it

found to be wages were “designed to reduce IBM’s overall workforce.” 228 F.3d at

1361; see also Associated Elec., 226 F.3d at 1327 (“Associated recognized that it was

attempting to induce employees to resign in an economic climate where other

employment was not readily available.”); Abbott v. United States, 76 F. Supp. 2d 236

2007-5003,-5007 35
(N.D.N.Y. 1999), aff’d, 231 F.3d 889 (2d Cir. 2000) (payments to induce employees to

resign were taxable “wages”); Cohen v. United States, 63 F. Supp. 2d 1131, 1134-36

(C.D. Cal. 1999) (payments in consideration for employee’s early retirement as part of a

company’s cost-cutting severance plan were “wages” under FICA); Greenwald v. United

States, 2000 WL 16939, at *4 (S.D.N.Y. Jan. 10, 2000) (severance payment to manager

whom employer wanted to replace was taxable under FICA); Meehan v. Comm’r, 122

T.C. 396, 401 (2004) (“[S]everance pay is itself a form of compensation. It is paid by

the taxpayer’s employer as compensation for termination of the employer-employee

relationship.”); see also Rev. Rul. 75-44, 1975-1 C.B. 15; I.R.S. Priv. Ltr. Rul. 93-31-007

(May 5, 1993).

A separation payment may be designed to induce the employee to leave or to

cushion the effect of a separation, as was true in Abrahamsen and Associated Electric,

but that does not deprive the payment of its character as wages under the broad

definition of that term for purposes of FICA. We therefore agree with the trial court that

the separation allowances to the unionized employees constituted taxable wages and

compensation.

IV

CSX next makes the related argument that the separation allowances to the

unionized employees are not wages because they were made in exchange for the

employees’ agreement to surrender their contract rights to employment and therefore

are properly viewed not as wages but as the proceeds of an exchange of property. That

argument is based principally on the Eighth Circuit’s decision in North Dakota State

University v. United States, 255 F.3d 599 (8th Cir. 2001).

2007-5003,-5007 36
 In North Dakota State, certain tenured faculty members as well as nontenured

administrators agreed to accept payments in exchange for opting in favor of early

retirement. The IRS treated the payments as wages. On appeal, the court held that the

payments to the nontenured administrators were wages subject to FICA, but it ruled

differently as to the tenured faculty members. As to that group, the court held that the

payments were made in exchange for the relinquishment of the faculty members’ tenure

rights and therefore were not “wages” because they did not consist of remuneration for

services rendered to the university.

CSX argues that, as in North Dakota State, the unionized employees in this case

gave up certain employment rights, such as rights under the collective bargaining

agreement, when they agreed to accept the separation allowances as part of a “buyout”

arrangement offered by CSX. Accordingly, CSX argues, those payments were not

“wages,” but were contractual exchanges of property.

Arguments akin to CSX’s based on North Dakota State have been rejected by

this court and by every other court that has addressed them. The decisions that have

addressed the ruling in North Dakota State have characterized that case as limited to

the special situation of university tenured faculty members surrendering their tenure

rights. In Associated Electric Cooperative, Inc. v. United States, 226 F.3d 1322, 1328

(Fed. Cir. 2000), this court rejected the argument that severance payments made to

union members were made in exchange for valuable rights, such as the union’s right to

strike, and thus were not payments for services performed. The court agreed that

securing the union’s agreement not to strike was critical to the agreement, but that

“Associated was motivated to offer the early out plan first and foremost on the basis of

2007-5003,-5007 37
economic benefits.” Id. Notwithstanding that Associated entered the agreement for

reasons other than rewarding employees for services rendered, the court nonetheless

concluded that the payments fit within the statutory definition of “wages.” Id. at 1328-29.

As we have noted, severance payments made to induce employees to relinquish

employment-related rights are considered wages. See Abrahamsen, 228 F.3d at 1364-

65 (payments under early-out plans constituted wages). Even in the context of

surrender of tenure rights, courts other than the North Dakota State court have held that

severance payments to tenured employees who have given up their tenure rights

constitute “wages” for FICA purposes. See Univ. of Pittsburgh v. United States, 507

F.3d 165 (3d Cir. 2007); Appoloni v. United States, 450 F.3d 185 (6th Cir. 2006). As the

Sixth Circuit explained in Appoloni,

We fail to see how this is different from other severance packages just
because a “tenure” right was exchanged. In almost all severance
packages an employee gives up something, and we have a hard time
distinguishing this case from similar cases where an employee, pursuant
to a severance package, gives up rights in exchange. Courts have
consistently held that severance payments for the relinquishment of rights
in the course of an employment relationship are FICA wages.

450 F.3d at 193.

Based on the analysis in Abrahamsen and in the court of appeals opinions cited

above, we agree with the trial court that none of the payments at issue in this case

constituted the proceeds of a sale of property or an analogous transaction. The

payments therefore cannot be deemed non-wages on that rationale.

V

CSX argues that the payments made to employees in the groups referred to as

“guaranteed extraboards” and “reserve pools” were SUB payments and not wages.

2007-5003,-5007 38
Employees in those groups had their full-time positions eliminated but remained subject

to recall on an as-needed basis. As such, they remained on CSX’s active service

payroll and were guaranteed a certain minimum compensation per pay period, adjusted

by the amounts they were paid for work actually performed. The trial court held that

those payments were not SUB payments even under section 3402(o), because those

employees were not separated from employment with the employer and therefore

concluded that the payments were not wages.

In light of our analysis above, even if the extraboard and reserve pool payments

satisfied the definition of SUB in section 3402(o) that would not keep them from being

taxable as “wages” and “compensation” under FICA and the RRTA. In addition,

however, there are clear indications in statute and regulation that such payments were

intended to be subject to employment taxation.

By regulation, the Treasury Department has characterized such payments as

taxable under the RRTA. Section 31.3231e-1(a)(4) of the RRTA regulations provides

that “compensation” under the RRTA “includes amounts paid to an employee for loss of

earnings during an identifiable period as the result of displacement of the employee to a

less remunerative position or occupation.” Treas. Reg. § 31.3231e-1(a)(4). That

provision describes the situation of the “guaranteed extraboard” and “reserve pool”

employees. CSX argues that extraboard and reserve pool employees are not covered

by that regulation because the regulation was designed for employees who were

assigned from one full-time job to another less remunerative full-time position. By its

terms, however, the regulation is not so narrow; the payments in this case were clearly

designed to cushion the effect of the loss of income for employees who went from a full-

2007-5003,-5007 39
time position to a position that offered them fewer hours and, correspondingly, less pay.

The part-time position was a “less remunerative position,” and thus the payments are

covered by the regulation.

Moreover, Congress has made clear that such payments constitute wages under

FICA. In 1950, Congress created a limited exception from FICA taxation for certain

employees who were paid for being on “stand-by” status. Social Security Act

Amendments of 1950, Pub. L. No. 81-734, § 203(a), 64 Stat. 477, 526-27. In 1983,

Congress repealed that limited exclusion from FICA taxation. See Social Security

Amendments of 1983, Pub. L. No. 98-21, § 324(a)(3)(B), 97 Stat. 65, 123. Both the

creation of the exclusion and its subsequent repeal make clear that, absent special

statutory exemption, such payments are considered wages for FICA purposes.

Although CSX points to several private letter rulings from the 1980s in which the IRS

treated “short-week” benefits as non-wages for FICA purposes, see Priv. Ltr. Rul. 85-

06-018 (Nov. 8, 1984); Priv. Ltr. Rul. 86-10-027 (Dec. 9, 1985); Priv. Ltr. Rul. 87-36-030

(June 8, 1987), we agree with the trial court that those rulings are not persuasive in light

of the statutory and regulatory provisions that support a contrary conclusion.

VI

CSX next argues that the IRS acted arbitrarily and discriminatorily when it

revoked a private letter ruling regarding the status of certain payments made to

nonunion employees who agreed to leave the company. As a result, CSX contends, the

IRS should be barred from collecting the taxes attributable to those payments.

In June 1987, CSX introduced a “Severance Pay Plan” for management

employees as part of its overall workforce reduction plan. The plan gave management

2007-5003,-5007 40
employees several payment options if they agreed to terminate their employment: a

lump-sum payment equal to one year’s salary; a number of monthly salary payments

(and continuation of fringe benefits), depending on the employee’s length of tenure with

the company; and an enhanced pension benefit. Shortly before the deadline for

employees to apply for that program, CSX sought a private letter ruling qualifying the

payments as not subject to FICA taxation.

The IRS withheld issuing the private letter ruling until after it issued Rev. Rul. 90-

72. It then issued a private letter ruling in which it advised CSX that the payments

under its plan did not qualify as SUB payments in light of that revenue ruling because

they were not linked to the receipt of state unemployment compensation benefits and

also because the benefits were offered in the form of a lump-sum payment. However,

the IRS provided in the letter ruling that because Rev. Rul. 90-72 was made prospective

only, the pre-1990 benefits would not be subject to employment taxation. I.R.S. Priv.

Ltr. Rul. 90-50-061 (Sept. 20, 1990). The following year, the IRS advised CSX that it

had reconsidered the private letter ruling and that it had erred when it initially

characterized the CSX plan as providing for SUB pay. Nonetheless, the IRS stated that

it had decided not to retroactively revoke the private letter ruling. The IRS pointed out,

however, that the private letter ruling applied only to the approximately 800 nonunion

employees who had voluntarily elected to separate from service in 1987 and that the

Service was under no obligation to apply the private letter ruling more broadly.

The following year, the IRS changed its position once again and this time decided

to revoke the private letter ruling retroactively. The reason given was that the

representations on which the private letter ruling was based did not reflect an accurate

2007-5003,-5007 41
statement of the material facts. In particular, the IRS concluded that CSX had not

advised it that the recipients of the benefits in question were disqualified from receiving

government unemployment benefits, which prevents the plan from qualifying as a SUB

payment plan. The IRS stated that CSX’s failure to reveal that fact in its ruling request

was an omission of a material fact that justified the retroactive revocation of the private

letter ruling. I.R.S. Tech. Adv. Mem. 94-16-003, 1993 WL 642695 (Dec. 31, 1993).

In the trial court and here, the government has acknowledged that the particular

factual basis that the IRS invoked for retroactively revoking the private letter ruling was

incorrect. Nonetheless, the trial court held that the revocation was not arbitrary or

discriminatory, because it correctly denied CSX a benefit that neither it nor any other

taxpayers were entitled to under the law. Because CSX did not rely on the letter ruling,

which was issued long after CSX paid the taxes on the separation payments, the court

concluded that revocation of the ruling left CSX in no worse position than if the ruling

had not been issued in the first place.

The parties do not dispute that while the IRS can elect to make the revocation of

a private letter ruling prospective only, it has the statutory authority to revoke or modify

a ruling retroactively in order to correct a mistake of law, even if the taxpayer has relied

on the erroneous ruling to its detriment. See Dickman v. United States, 465 U.S. 330,

343 (1984); Dixon v. United States, 381 U.S. 68, 72-75 (1968). Thus, if the IRS’s

position with respect to the taxation of the payments was correct, the IRS was plainly

authorized to revoke its private letter ruling retroactively in this case. The only question

is whether it did so in a manner that improperly discriminated against CSX as compared

with other similarly situated taxpayers.

2007-5003,-5007 42
 The trial court correctly held that CSX was not entitled to the favorable tax

treatment that the private letter ruling would have accorded it. For one thing, regardless

of the outcome of the dispute over whether SUB payments under section 3402(o) are

non-wages for purposes of FICA, the payments at issue under the private letter ruling

would not be affected, because those separations were voluntary, and thus the

payments could not qualify as SUB benefits under any standard. In any event, the

payments disqualified the recipients from receiving state unemployment benefits; the

plan was thus different in that respect from the plans at issue in both Rev. Rul. 77-347

and Rev. Rul. 56-249.

Moreover, the decision to apply the revocation retroactively was consistent with

IRS practice with respect to completed transactions, such as the 1987 payments at

issue here. By regulation, the Treasury Department has provided that the IRS will rarely

revoke a private letter ruling retroactively if the ruling was issued with respect to a

proposed transaction and the taxpayer acted in good faith detrimental reliance on the

ruling. Treas. Reg. § 601.201(l)(5). However, where the ruling issues after the fact with

respect to a completed transaction, as was the case here, the regulation provides that

“taxpayers will not be afforded protection against retroactive revocation . . . since they

will not have entered into the transactions in reliance on the rulings.” Id. § 601.201(l)(9).

Finally, as the trial court noted, CSX has not pointed to any competitors who

were given preferred treatment under private letter rulings that were not revoked.

Although CSX notes that some private letter rulings had given favorable tax treatment to

severance payments in the automobile industry, none of the other industry letter rulings

involved post-transaction advice, but instead involved parties that relied to their

2007-5003,-5007 43
detriment on the private letter rulings. Under these circumstances, we agree with the

trial court that it was not an abuse of discretion for the IRS to give retroactive effect to its

revocation of the 1990 private letter ruling dealing with separation allowances to CSX’s

non-unionized employees.

VII

In summary, we reverse the trial court’s holding that payments falling within the

definition of supplemental unemployment benefits under section 3402(o) are non-

wages. To the contrary, the payments to the various groups of employees who were

accorded benefits in connection with CSX’s reduction in force were all “wages” or

“compensation” as those terms are used in FICA and the RRTA.

The employees who were placed in layoff status received benefits that

represented a fixed percentage of their average monthly compensation; the duration of

the payments was governed by each employee’s length of service with the employer.

As such, the payments were similar to the payments at issue in Abrahamsen, which this

court held were wages. We reverse the trial court’s ruling that those payments were not

wages because they qualified as SUB payments under section 3402(o).

The separation payments made to non-management employees, whether on lay-

off status or otherwise, who chose to sever their relationship with CSX constituted

wages. Again, those payments were dismissal or severance payments of the sort that

have consistently been treated as wages for FICA purposes. We affirm the trial court

with respect to those separation payments that the court held to be wages and reverse

as to those payments that the court held not to be wages.

2007-5003,-5007 44
 The payments to management employees who were separated from

employment, either voluntarily or involuntarily, were also wages. Those payments

constituted dismissal or severance payments that were closely analogous in character

to the dismissal payments that were held to be wages in Abrahamsen. Because the

trial court held that some of the payments in this group constituted wages and some did

not, we affirm the trial court’s judgment in part and reverse in part.

Finally, we hold that the payments made to employees whose full-time positions

were eliminated but who continued to be employed by the company were wages and

were subject to employment taxation. We affirm the trial court’s ruling as to those

payments.

Because our disposition of the issues presented in this appeal appears to resolve

all the substantive aspects of the dispute between the parties in this case, we remand to

the trial court for the entry of judgment and resolution of any ancillary matters that may

be necessary.

Each party shall bear its own costs for this appeal.

AFFIRMED IN PART, REVERSED IN PART, and REMANDED.

2007-5003,-5007 45