775 F.3d 743 (5th Cir. 2015), 13-10014, BNSF Railway Co. v. United States

Docket Nº:13-10014
Citation:775 F.3d 743
Opinion Judge:PATRICK E. HIGGINBOTHAM, Circuit Judge.
Party Name:BNSF RAILWAY COMPANY, formerly the Burlington Northern and Santa Fe Railway Company, as successor by merger to Burlington Northern Railroad Company and the Atchison Topeka and Santa Fe Railway Company, Plaintiff -- Appellee v. UNITED STATES OF AMERICA, Defendant -- Appellant
Attorney:For BNSF RAILWAY COMPANY, formerly The Burlington Northern and Santa Fe Railway Company, as successor by merger to Burlington Northern Railroad Company and The Atchison Topeka and Santa Fe Railway Company, Plaintiff - Appellee: Mary Bell Hevener, Esq., Morgan, Lewis & Bockius, L.L.P., Washington,...
Judge Panel:Before HIGGINBOTHAM, OWEN, and HIGGINSON, Circuit Judges.
Case Date:January 15, 2015
Court:United States Courts of Appeals, Court of Appeals for the Fifth Circuit

Page 743

775 F.3d 743 (5th Cir. 2015)

BNSF RAILWAY COMPANY, formerly the Burlington Northern and Santa Fe Railway Company, as successor by merger to Burlington Northern Railroad Company and the Atchison Topeka and Santa Fe Railway Company, Plaintiff -- Appellee

v.

UNITED STATES OF AMERICA, Defendant -- Appellant

No. 13-10014

United States Court of Appeals, Fifth Circuit

January 15, 2015

Page 744

[Copyrighted Material Omitted]

Page 745

Appeal from the United States District Court for the Northern District of Texas.

For BNSF RAILWAY COMPANY, formerly The Burlington Northern and Santa Fe Railway Company, as successor by merger to Burlington Northern Railroad Company and The Atchison Topeka and Santa Fe Railway Company, Plaintiff - Appellee: Mary Bell Hevener, Esq., Morgan, Lewis & Bockius, L.L.P., Washington, DC; William F. Colgin, Jr., Attorney, Direct: 650-843-7270, Morgan, Lewis & Bockius, L.L.P., Palo Alto, CA; Allyson Newton Ho, Morgan, Lewis & Bockius, L.L.P., Dallas, TX; Steven Paul Johnson, Morgan, Lewis & Bockius, L.L.P., Washington, DC; Robert Ryan Martinelli, Morgan, Lewis & Bockius, L.L.P., Washington, DC; Ellen L. Perlioni, Morgan, Lewis & Bockius, L.L.P., Dallas, TX; John Clay Sullivan, Morgan, Lewis & Bockius, L.L.P., Dallas, TX.

For UNITED STATES OF AMERICA, Defendant - Appellant: Ellen Page DelSole, Esq., Trial Attorney, U.S. Department of Justice, Tax Division, Appellate Section, Washington, DC; Kenneth L. Greene, Esq., Supervisory Attorney, U.S. Department of Justice, Tax Division, Appellate Section, Washington, DC; Curtis Cutler Smith, U.S. Department of Justice, Tax Division, Dallas, TX; Francesca Ugolini, U.S. Department of Justice, Tax Division, Appellate Section, Washington, DC; For ASSOCIATION OF AMERICAN RAILROADS, Amicus Curiae: Paul D. Clement, Bancroft, P.L.L.C., Washington, DC; Jeffrey Matthew Harris, Bancroft, P.L.L.C., Washington, DC.

For CATO INSTITUTE, PATRICK J. SMITH, PROFESSOR MICHAEL P. MORELAND PROFESSOR JEFFREY POJANOWSKI NATHAN A. SALES Amici Curiae: Jeremy Daniel Kernodle, Haynes & Boone, L.L.P., Dallas, TX.

For AMERICAN PAYROLL, PROFESSOR GREGG POLSKY Amici Curiae: Leif A. Olson, Olson Firm, P.L.L.C., Humble, TX.

Before HIGGINBOTHAM, OWEN, and HIGGINSON, Circuit Judges.

OPINION

Page 746

PATRICK E. HIGGINBOTHAM, Circuit Judge.

ON PETITION FOR REHEARING

Treating the petition for rehearing en banc as a petition for panel rehearing, the petition for rehearing is GRANTED. We WITHDRAW our earlier opinion, BNSF Railway Company v. United States,1 in its entirety, and SUBSTITUTE the following:

BNSF Railway Company (" BNSF" ) filed suit seeking refunds of certain taxes that it, and its predecessor companies, paid pursuant to the Railroad Retirement Tax Act (" RRTA" ). BNSF claimed that it overpaid when it included (i) Non-Qualified Stock Options (" NQSO" ), and (ii) certain moving expenses as taxable compensation. The parties stipulated to the facts and, on cross-motions for summary judgment, the district court granted summary judgment in favor of BNSF on all its refund claims. We REVERSE.

I.

BNSF is a rail carrier2 that operates an international railroad system consisting of approximately 32,000 miles of rail throughout the Western United States and Canada. BNSF was formed by the 1996 merger of The Atchison Topeka and Santa Fe Railway Company with the Burlington Northern Railroad Company.3 At issue in this case are (i) Burlington Northern Railroad Company's 1993, 1994, and 1995 tax years; (ii) The Atchison Topeka and Santa Fe Railway Company's 1994 and 1995 tax years; and, (iii) BNSF's 1996, 1997, and 1998 tax years.

As a rail carrier, BNSF and its employees are subject to the Railroad Retirement Tax Act (" RRTA" ).4 BNSF now seeks a refund of the employer and employee portions of taxes paid on the exercise of NQSOs and certain moving expenses.

A.

During the tax years at issue, BNSF offered salaried employees and executives a combination of Incentive Stock Options (" ISO" )5 and NQSOs. The stated purpose of the stock option plans was to provide employees with a competitive compensation

Page 747

package.6 At the time the stock option plans were adopted, BNSF paid its employees and executives salaries that were below industry average, but because of the stock option plans, provided an overall compensation package that was above industry average.7 Each year, BNSF's Board of Directors determined the number of stock options to grant.8 Once the number was determined, BNSF awarded stock options in part as compensation for services rendered by employees and in part as an award for job performance.9 These options were then awarded as either ISOs or NQSOs.10 Additionally, BNSF's Board of Directors determined the final deadline for exercising the options and the vesting period for each option grant.11

When an employee exercised a NQSO, the employee would pay the price for the share that was the market price on the day the option was granted (the " strike price" ).12 Approximately 90-95% of the time, the employee would then sell the share at the same time, such that the employee would only receive the difference between the strike price and the exercise price.13 Alternatively, the employee could keep the stocks, either by paying the broker the strike price when executing the option or by selling enough stock to cover the strike price and taxes, and then keeping the remaining shares.14

NQSOs were exercised in one of two ways: (i) non-executive employees exercised their NQSOs through BNSF's transfer agent,15 and (ii) executive employees were permitted to use their private brokers to exercise their NQSOs.16 Non-executive employees would either fax or hand-deliver an exercise notification sheet to BNSF's compensation department, who would then authorize BNSF's transfer agent to exercise the option.17 The transfer agent would then either forward the stock certificate to the employee or disburse the net gain amount on the sale of the stock. For executives, the transfer agent would directly transfer the purchased shares to the executive's private broker.18

BNSF did not directly pay cash or send the stock certificate to the employee, but it did record all transaction information into a stock option tracking system. BNSF would calculate the amount of RRTA taxes due and would inform the transfer agent of the amount of tax to be withheld.19

During the years at issue, 3,192 BNSF employees exercised NQSOs, representing $348,805,183.03 total spread on exercise.20 BNSF and its employees paid a total of $16,432,583.01 in RRTA taxes on exercised NQSOs.21

Page 748

B.

From 1994 to 1996, many BNSF employees were required to relocate as a result of the consolidation and restructuring of operations, the merger, and employee promotions and transfers. 22 Whenever BNSF asked an employee to move, it would pay a substantial portion of the moving expenses.23 In total, BNSF paid approximately $135,000,000 in employee moving expenses during the period at issue.24

These payments were made pursuant to a written policy in BNSF's relocation manuals for non-union employees and pursuant to collective bargaining agreements for union employees.25 Typically, BNSF paid moving expenses in one of two ways: (i) by direct payment to the service providers, or (ii) by a lump sum payment to employees, who could generally keep any excess payment over expenses actually incurred and who were not required to provide substantiation.26 When BNSF paid a lump sum, it typically did so through a third-party agent hired by BNSF to administer the moving-expenses benefit program.27 The lump sum payments were calculated by using a benchmark based on average reimbursement amounts paid by similarly situated companies. Typically, the lump sum payment was $20,000 for homeowners and $10,000 for non-homeowners.28 Additionally, BNSF generally paid employees a 'tax gross-up' to cover additional tax due on these moving expense benefits.29

BNSF considered certain moving expenses to be properly excluded moving expense payments and reimbursements under 26 U.S.C. § 217. BNSF did not withhold federal income tax or RRTA employment tax on these expenses, and accordingly, these expenses are not at issue.30 BNSF provided a number of other moving expense benefits that were not excludable under § 217, including: professional relocation company expenses, babysitting expenses, car rental expenses, home sale costs (including appraisals, title searches, and inspections), meals, pest extermination, pet relocation services, personal property storage, and reimbursement for lease cancellation fees.31 BNSF claims that these expenses were not provided as compensation for employees' services to BNSF, but instead were provided as a means of retaining qualified and knowledgeable employees.32 In short, BNSF claims that without these moving expense benefits, employees would have been unable to relocate and thereby forced to resign. Accordingly, BNSF claims that these benefits were paid to stay competitive.

C.

From 1993 to 1998, BNSF, and its predecessors-in-interest, filed refund claims for both the employer and employee portions of the RRTA tax paid on NQSOs

Page 749

exercised during that time period.33 Additionally, BNSF filed formal refund claims for the employer portion of tax paid on moving expenses for 1994 through 1998,34 as well as the employee portion for 1994, 1995, and 1998.35 The Internal Revenue Service (" IRS" ) granted the refund claims for the employer portion of the RRTA tax paid on moving expenses for 1996 through 1998, and although the IRS now claims those refunds were in error, the IRS does not seek recovery of those refunds as the relevant statute of limitations has expired.

With respect to the employee portions of tax paid on moving expenses for 1996 and 1997, BNSF did not file a formal refund claim.36 When BNSF amended its federal railroad retirement tax returns (Form CT-1) for...

To continue reading

FREE SIGN UP