United States v. Cleveland Indians Baseball Co.

• Docket Number: 00-203.
• Decision Date: 17 April 2001
• Citation: 532 U.S. 200,149 L.Ed.2d 401,121 S.Ct. 1433
• Parties: UNITED STATES v. CLEVELAND INDIANS BASEBALL CO.
• Court: U.S. Supreme Court

532 U.S. 200

149 L.Ed.2d 401

121 S.Ct. 1433

UNITED STATES v. CLEVELAND INDIANS BASEBALL CO.

No. 00-203.

Supreme Court of the United States

Argued February 27, 2001

Decided April 17, 2001

James A. Feldman argued the cause for the United States. With him on the briefs were Acting Solicitor General Underwood, former Solicitor General Waxman, Acting Assistant Attorney General Junghans, Deputy Solicitor General Wallace, Kent L. Jones, Kenneth L. Greene, and Robert W. Metzler.

Carter G. Phillips argued the cause for respondent. With him on the brief were Richard D. Bernstein, Stephen B. Kinnaird, and Anne Berleman Kearney.^*

JUSTICE GINSBURG delivered the opinion of the Court.

The Federal Insurance Contributions Act (FICA) and the Federal Unemployment Tax Act (FUTA) impose excise taxes on employee wages to fund Social Security, Medicare, and unemployment compensation programs. This case concerns the application of FICA and FUTA taxes to payments of back wages. The Internal Revenue Service has consistently maintained that, for tax purposes, backpay awards should be attributed to the year the award is actually paid. Respondent Cleveland Indians Baseball Company (Company) urges, and the Court of Appeals for the Sixth Circuit held, that such awards must be allocated, as they are for purposes of Social Security benefits eligibility, to the periods in which the wages should have been paid. According due respect to the Service's reasonable, longstanding construction of the governing statutes and its own regulations, we hold that back wages are subject to FICA and FUTA taxes by reference to the year the wages are in fact paid.

I

Pursuant to a settlement of grievances asserted by the Major League Baseball Players Association concerning players' free agency rights, several Major League Baseball clubs agreed to pay $280 million to players with valid claims for salary damages. Under the agreement, the Company owed 8 players a total of $610,000 in salary damages for 1986, and it owed 14 players a total of $1,457,848 in salary damages for 1987. The Company paid the awards in 1994. No award recipient was a Company employee in that year.

This case concerns the proper FICA and FUTA tax treatment of the 1994 payments. Under FICA, both employees and employers must pay tax on wages to fund Social Security and Medicare; under FUTA, employers (but not employees) must pay tax on wages to fund unemployment benefits. For purposes of this litigation, the Government and the Company stipulated that the settlement payments awarded to the players qualify as "wages" within the meaning of FICA and FUTA. The question presented is whether those payments, characterized as back wages, should be taxed by reference to the year they were actually paid (1994), as the Government urges, or by reference to the years they should have been paid (1986 and 1987), as the Company and its supporting amicus, the Major League Baseball Players Association, contend.

In any given year, the amount of FICA and FUTA tax owed depends on two determinants. The first is the tax rate. 26 U. S. C. §§ 3101, 3111 (FICA), § 3301 (FUTA). The second is the statutory ceiling on taxable wages (also called the wage base), which limits the amount of annual wages subject to tax. § 3121(a)(1) (FICA), § 3306(b)(1) (FUTA). Both determinants have increased over time. In 1986, the Social Security tax on employees and employers was 5.7 percent on wages up to $42,000;¹ in 1987, it was 5.7 percent on wages up to $43,800;² and in 1994, 6.2 percent on wages up to $60,600.³ Although the Medicare tax on employees and employers remained constant at 1.45 percent from 1986 to 1994,⁴ the taxable wage base rose from $42,000 in 1986 to $43,800 in 1987,⁵ and by 1994, Congress had abolished the wage ceiling, thereby subjecting all wages to the Medicare tax.⁶ In 1986 and 1987, the FUTA tax was 6.0 percent on wages up to $7,000;⁷ in 1994, it was 6.2 percent on wages up to $7,000.⁸

In this case, allocating the 1994 payments back to 1986 and 1987 works to the advantage of the Company and its former employees. The reason is that all but one of the employees who received back wages in 1994 had already collected wages from the Company exceeding the taxable maximum in 1986 and 1987. Because those employees as well as the Company paid the maximum amount of employment taxes chargeable in 1986 and 1987, allocating the 1994 payments back to those years would generate no additional FICA or FUTA tax liability. By contrast, treating the back wages as taxable in 1994 would subject both the Company and its former employees to significant tax liability. The Company paid none of the employees any other wages in 1994,⁹ and FICA and FUTA taxes attributable to that year would be calculated according to tax rates and wage bases higher than their levels in 1986 and 1987.

Uncertain about the proper rule of taxation, the Company paid its share of employment taxes on the back wages according to 1994 tax rates and wage bases. Its FICA payment totaled $99,382, and its FUTA payment totaled $1,008.¹⁰ After the Internal Revenue Service denied its claims for a refund of those payments, the Company initiated this action in District Court, relying on Bowman v. United States, 824 F. 2d 528 (CA6 1987). In Bowman, the Sixth Circuit held that "[a] settlement for back wages should not be allocated to the period when the employer finally pays but 'should be allocated to the periods when the regular wages were not paid as usual.' " Id., at 530 (quoting Social Security Bd. v. Nierotko, 327 U. S. 358, 370 (1946)). The District Court, bound by Bowman, entered judgment for the Company and ordered the Government to refund $97,202 in FICA and FUTA taxes.¹¹

On appeal, the Government observed that two Courts of Appeals have held, in disagreement with Bowman, that under the law as implemented by Treasury Regulations, wages are to be taxed for FICA purposes in the year they are actually received. Walker v. United States, 202 F. 3d 1290, 1292-1293 (CA10 2000) (finding Nierotko "inapposite" and Bowman "unpersuasive"); Hemelt v. United States, 122 F. 3d 204, 210 (CA4 1997) (finding it "clear under the Treasury Regulations that 'wages' are to be taxed for FICA purposes in the year in which they are received"). The Court of Appeals for the Sixth Circuit nevertheless affirmed on the authority of Bowman. 215 F. 3d 1325 (2000) (judgt. order).

We granted certiorari to resolve the conflict among the Courts of Appeals, 531 U. S. 943 (2000), and now reverse the Sixth Circuit's judgment.

II

The Internal Revenue Code imposes employment taxes "on every employer . . . equal to [a percentage of] wages . . . paid by him with respect to employment." 26 U. S. C. §§ 3111(a), 3111(b), 3301. The Social Security tax provision, § 3111(a), contains a table prescribing tax rates applicable to "wages paid during" each year from 1984 onward (e. g., "In cases of wages paid during . . . 1990 or thereafter . . . [t]he rate shall be . . . 6.2 percent."). The Medicare tax provision, § 3111(b)(6), says "with respect to wages paid after December 31, 1985, the rate shall be 1.45 percent." And the FUTA tax provision, 26 U. S. C. § 3301 (1994 ed., Supp. IV), says the rate shall be "6.2 percent in the case of calendar years 1988 through 2007 . . . of the total wages (as defined in section 3306(b)) paid by [the employer] during the calendar year."

Section 3121(a) of the Code establishes the annual ceiling on wages subject to Social Security tax. It does so by defining "wages" to exclude any remuneration "paid to [an] individual by [an] employer during [a] calendar year" that exceeds "remuneration . . . equal to the contribution and benefit base . . . paid to [such] individual by [such] employer during the calendar year with respect to which such contribution and benefit base is effective." Section 3306(b)(1) similarly limits annual wages subject to FUTA tax by excluding from "wages" any remuneration "paid to [an] individual by [an] employer during [a] calendar year" that exceeds "remuneration . . . equal to $7,000 . . . paid to [such] individual by [such] employer during [the] calendar year."

Both sides in this controversy have offered plausible interpretations of Congress' design. We set out next the parties' positions and explain why we ultimately defer to the Internal Revenue Service's reasonable, consistent, and longstanding interpretation of the FICA and FUTA provisions in point. Under that interpretation, wages must be taxed according to the year they are actually paid.

A

In the Government's view, the text of the controlling FICA and FUTA tax provisions explicitly instructs that employment taxes shall be computed by applying the tax rate and wage base in effect when wages are actually paid. In particular, the Government calls attention to the statute's constant references to wages paid during a calendar year as the touchstone for determining the applicable tax rate and wage base. 26 U. S. C. § 3111(a) (setting Social Security tax rates for "wages paid during" particular calendar years); § 3121(a) (defining Social Security wage base in terms of "remuneration . . . paid . . . during the calendar year"); § 3301 (setting FUTA tax rate as a percentage of "wages . . . paid . . . during the calendar year"); § 3306(b)(1) (defining FUTA wage base in terms of "remuneration . . . paid . . . during any calendar year"). The meaning of this language, the Government contends, is plain: Wages are taxed according to the calendar year they are in fact paid, regardless of when they should have been paid.

In support of this reading, the Government observes that Congress chose the words in the current statute specifically to replace language in the original 1935 Social Security Act providing that FICA and FUTA tax rates applied to wages paid or received "with respect to employment during the calendar year." Social Security Act (1935 Act), §§ 801, 804, 901, 49 Stat. 636-637, 639 (emphasis added). The Treasury...