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