Balestra v. United States

• Decision Date: 13 October 2015
• Docket Number: No. 2014–5127.,2014–5127.
• Citation: 803 F.3d 1363
• Parties: Louis J. BALESTRA, Jr., Phyllis Balestra, Plaintiffs–Appellants v. UNITED STATES, Defendant–Appellee.
• Court: U.S. Court of Appeals — Federal Circuit

803 F.3d 1363

Louis J. BALESTRA, Jr., Phyllis Balestra, Plaintiffs–Appellants

v.UNITED STATES, Defendant–Appellee.

No. 2014–5127.

United States Court of Appeals, Federal Circuit.

Oct. 13, 2015.

Mary Monahan, Sutherland Asbill & Brennan LLP, Washington, DC, argued for plaintiffs-appellants. Also represented by Adam B. Cohen.

Jonathan S. Cohen, Tax Division, United States Department of Justice, Washington, DC, argued for defendant-appellee. Also represented by Jennifer Marie Rubin, Caroline D. Ciraolo.

Before LOURIE, PLAGER, and DYK, Circuit Judges.

PLAGER, Circuit Judge.

Introduction

This is a tax refund case. The Balestras seek a refund of $3,285.26 for Federal Insurance Contribution Act (“FICA”) tax paid on certain deferred compensation—retirement benefits in this case—that Mr. Balestra will never receive due to his employer's bankruptcy proceedings.

The tax was based on a calculation of the “amount deferred” under 26 U.S.C. § 3121(v)(2)(A) (2000). Congress did not define the phrase “amount deferred.” Instead, the Department of the Treasury (“Treasury”) promulgated a regulation defining the “amount deferred” in terms of the deferred compensation's “present value.” This definition prohibited any consideration of an employer's financial condition (e.g., bankruptcy) in calculating the amount deferred. See 26 C.F.R. § 31.3121(v)(2)–1(c)(2)(ii).

The Balestras challenge this regulation as inconsistent with the statute, citing the analysis required by Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 104 S.Ct. 2778, 81 L.Ed.2d 694 (1984). They also contend that the regulation is arbitrary and capricious under Motor Vehicle Manufacturers Ass'n of the United States, Inc. v. State Farm Mutual Automobile Insurance Co.,

463 U.S. 29, 103 S.Ct. 2856, 77 L.Ed.2d 443 (1983).

After exhausting their administrative remedies before the Internal Revenue Service, they brought suit in the U.S. Court of Federal Claims seeking a refund of the taxes paid. When the trial court denied them a remedy, they brought this appeal.

Background

A.

FICA tax includes both the social security tax and the hospital insurance tax. See 26 U.S.C. §§ 3101(a) -(b). This case concerns FICA tax and the hospital insurance tax in particular. The hospital insurance tax is imposed on every individual's income. Id. § 3101(b). The tax is collected by a withholding mechanism. Id. § 3102(a). The taxpayer's employer collects and remits the tax due by deducting the amount of the tax from the employee's wages as and when paid. Id.

For the relevant 2004 tax year, the hospital insurance tax was 1.45% of an individual's “wages” received with respect to employment. Id. § 3101(b)(6) ; 26 C.F.R. § 31.3101–2(c). “Wages” are defined in 26 U.S.C. § 3121(a) and include the deferred compensation at issue. On appeal, the parties do not dispute this fact.

A critical question is when the wages are received.

Generally, wages are received when they are paid by the employer to the employee, and wages are paid by the employer when they are actually or constructively paid. 26 C.F.R. § 31.3121(a)–2. The same rule is generally true for FICA tax purposes. Id. § 31.3121(v)(2)–1(a)(1).

However, some wages—including the deferred compensation at issue here—are treated differently under the “special timing rule” for FICA tax purposes. Id. § 31.3121(v)(2)–1(a)(2). This special timing rule only applies to wages under 26 U.S.C. § 3121(a) if those wages are from a “nonqualified deferred compensation plan” as described in 26 C.F.R. § 31.3121(v)(2)–1(b). Id. Both Congress and Treasury define “nonqualified deferred compensation plan.” See 26 U.S.C. § 3121(v)(2)(C) (Congress's definition); 26 C.F.R. § 31.3121(v)(2)–1(b) (Treasury's definition). The parties agree that the plan at issue is such a plan.

With respect to nonqualified deferred compensation plans, Congress provided that:

Any amount deferred under a nonqualified deferred compensation plan shall be taken into account for purposes of this chapter as of the later of—(i) when the services are performed, or (ii) when there is no substantial risk of forfeiture of the rights to such amount.

26 U.S.C. § 3121(v)(2)(A) (emphasis added).

Some nonqualified deferred compensation plans—including the plan at issue—are also “nonaccount balance plans” as described in 26 C.F.R. § 31.3121(v)(2)–1(c)(2). For such plans, Treasury defined an “amount deferred” in terms of the “present value” of the deferred compensation (the future payments). 26 C.F.R. § 31.3121(v)(2)–1(c)(2)(i).

Treasury defined “present value” in this context:

For purposes of this section, present value means the value as of a specified date of an amount or series of amounts due thereafter, where each amount is multiplied by the probability that the condition or conditions on which payment of the amount is contingent will be satisfied, and is discounted according to an assumed rate of interest to reflect the time value of money. For purposes of this section, the present value must be determined as of the date the amount deferred is required to be taken into account as wages under paragraph (e) of this section using actuarial assumptions and methods that are reasonable as of that date. For this purpose, a discount for the probability that an employee will die before commencement of benefit payments is permitted, but only to the extent that benefits will be forfeited upon death. In addition, the present value cannot be discounted for the probability that payments will not be made (or will be reduced) because of the unfunded status of the plan, the risk associated with any deemed or actual investment of amounts deferred under the plan, the risk that the employer, the trustee, or another party will be unwilling or unable to pay, the possibility of future plan amendments, the possibility of a future change in the law, or similar risks or contingencies. Nor is the present value affected by the possibility that some of the payments due under the plan will be eligible for one of the exclusions from wages in section 3121(a).

Id. § 31.3121(v)(2)–1(c)(2)(ii) (emphasis added).

B.

As a result of this statutory and regulatory background, the Balestras effectively paid FICA tax on wages they will never receive.

Mr. Balestra was employed as a pilot by United Airlines (“United”) from January 29, 1979 until his retirement on October 1, 2004. Upon retirement, Mr. Balestra was eligible to receive retirement benefits through a non-qualified deferred compensation plan that was also a nonaccount balance plan. He was to receive, inter alia, continuing payments for the rest of his life. He elected to start his benefits effective the day of his retirement. United, as his employer, therefore withheld hospital insurance tax from Mr. Balestra in the 2004 tax year. Mr. and Mrs. Balestra filed a joint return for that tax year.

The tax withheld by United was based on the then-applicable 1.45% statutory tax rate applied to the present value of the deferred compensation that Mr. Balestra was to receive under the plan. In compliance with the statute and regulation at issue, United calculated the present value of the deferred compensation to be $289,601.18. United therefore withheld 1.45% of this amount ($4,199.22) in hospital insurance tax from Mr. Balestra.

United was set to pay Mr. Balestra retirement benefits for the duration of his life. However, United had entered bankruptcy proceedings in 2002, and its obligations to pay these benefits were eventually discharged in those proceedings. United ceased paying benefits to Mr. Balestra in 2010.

As a result, Mr. Balestra actually received only $63,032.09 in benefits, even though he effectively (through his employer's withholding) paid a hospital tax based on $289,601.18 in benefits. Since the Balestras filed a joint tax return in 2004, they seek a refund of $3,285.26—the amount of tax paid on compensation they will never receive.

In May 2007, the Balestras filed an administrative claim before Treasury requesting a refund of the tax paid. That claim was denied.

In May 2009, the Balestras filed the present action for a refund in the United States Court of Federal Claims (“trial court”). The trial court granted the Government's motion for summary judgment and denied the Balestras' cross-motion for summary judgment. The trial court determined, inter alia, that the regulation at issue, 37 C.F.R. § 3121(v)(2)–1(c)(2)(ii), satisfies Chevron and State Farm. The trial court also denied as moot the Government's motion to amend the answer to add a defense.

The Balestras timely appealed. Before this court, they argue that the regulation does not satisfy Chevron or State Farm. They contend that under the terms of the governing statute, the regulation is invalid or inapplicable to their situation because United was in bankruptcy proceedings when the deferred compensation's present value was calculated. They also contend that the regulation is arbitrary and capricious because it departs from the plain meaning of “present value” without a sufficient explanation.

We have jurisdiction under 28 U.S.C. § 1295(a)(3).

Discussion

We review the trial court's grant of summary judgment without deference. Consolidation Coal Co. v. United States, 615 F.3d 1378, 1380 (Fed.Cir.2010). The trial court was bound by the Rules of the United States Court of Federal Claims (“RCFC”). Under those rules, summary judgment is proper “if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.”RCFC 56(a). We review the court's denial of a motion to amend a complaint for abuse of discretion. Shinnecock Indian Nation v. United States, 782 F.3d 1345, 1348 (Fed.Cir.2015).

We agree with the Balestras that, regarding an agency with rulemaking authority such as Treasury, we review the agency's regulatory interpretation of a statute it administers under the Supreme Court's guidance in Chevron. See Mayo Found. for Med. Educ. & Research v. United States, 562 U.S....