Wis. Cent. Ltd. v. United States

• Decision Date: 08 May 2017
• Docket Number: Nos. 16-3300,-3304,-3303,s. 16-3300
• Citation: 856 F.3d 490
• Parties: WISCONSIN CENTRAL LTD., Illinois Central R.R. Co., and Grand Trunk Western R.R. Co., Plaintiffs–Appellants, v. UNITED STATES of America, Defendant–Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

856 F.3d 490

WISCONSIN CENTRAL LTD., Illinois Central R.R. Co., and Grand Trunk Western R.R. Co., Plaintiffs–Appellants,

v.UNITED STATES of America, Defendant–Appellee.

Nos. 16-3300

-3303

-3304

United States Court of Appeals, Seventh Circuit.

Argued March 30, 2017

Decided May 8, 2017

William J. McKenna, Jr., Attorney, Foley & Lardner LLP, Chicago, IL, Richard F. Riley, Jr., Attorney, Foley & Lardner LLP, Washington, DC, for Wisconsin Central Limited.

Jonathan W. Garlough, William J. McKenna, Jr., Attorneys, Foley & Lardner LLP, Chicago, IL, Richard F. Riley, Jr., Attorney, Foley & Lardner LLP, Washington, DC, for Illinois Central Railroad Company and Grand Trunk Western Railroad Company.

Ellen P. DelSole, Noreene C. Stehlik, Francesca Ugolini, Attorneys, Department of Justice, Washington, DC, Prashant Kolluri, Attorney, Office of the United States Attorney, Chicago, IL, for Defendant–Appellee.

Maureen A. McGuire, Attorney, Anderson, Rasor & Partners, LLP, Chicago, IL, for Amicus Curiae Association of American Railroads.

Before Posner, Manion, and Hamilton, Circuit Judges.

Posner, Circuit Judge.

Beginning in 1996, the plaintiff-appellants, subsidiaries of the Canadian National Railway Company (to simplify we'll refer to the subsidiaries as "the railway"), began including stock options in the compensation plans of a number of employees. In this suit against the government, the railway argues that income from the exercise of stock options that a railroad gives its employees is not a form of "money remuneration" to them and is therefore not taxable to the railway as compensation under the Railroad Retirement Tax Act, 26 U.S.C. § 3231(e)(1), which defines "compensation" as "any form of money remuneration paid to an individual for services rendered as an employee to one or more employers." See also BNSF Railway Co. v. United States , 775 F.3d 743 (5th Cir. 2015).

As explained in Standard Office Building Corp. v. United States , 819 F.2d 1371, 1373 (7th Cir. 1987), "the Railroad Retirement Tax Act, passed in 1937, is to the railroad industry what the Social Security Act is to other industries: the imposition of an employment or payroll tax on both the employer and the employee, with the proceeds used to pay pensions and other benefits.... The Act requires the railroad to pay an excise tax equal to a specified percentage of its employees' wages, and also to withhold a specified percentage of its employees' wages as their share of the tax. The railroad retirement tax rates are much higher than the social security tax rates."

The question presented by this case is whether the excise tax should be levied not only on employees' wages but also on the value of stock options exercised by employees who, having received the options from their employer, exercise them when the market price exceeds the "strike price" (the price at which the employee has a right to buy the stock) and thus obtain the stock at a favorable price. The Internal Revenue Service answers yes, see 26 C.F.R. § 31.3231(e)-1, and the district court agreed, precipitating this appeal.

The lawyer for the IRS told us at oral argument that anything that has a market value is a "form of money remuneration." That goes too far; it would impose a tax liability on an employer who bought an employee a birthday cake, even though the employee could do nothing with his cake except eat it or give it away. But if instead he exercises a stock option, he now owns stock, and stock has so well-defined a monetary value in our society that there is no significant economic difference between receiving a $1000 salary bonus and a share or shares of stock having a market value of $1000.

By compensating an employee with stock options rather than cash the employer encourages the employee to work harder for the company, because the better the company does the more valuable its stock is. The value of a company's stock is a function of the company's profitability, whereas the size of a cash bonus, once it is given, is unaffected by the company's future business successes or failures. Underscoring the point, we note that the railway's stock-option plans are performance-based: they can be exercised only if the company achieves specified goals.

As the discussion in the preceding paragraphs implies, the fact that cash and stock are not the same things doesn't make a stock-option plan any less a "form of money remuneration" than cash. Indeed the railway offers its employees a choice to have an agent exercise an employee's stock option, sell the shares of stock obtained by that exercise of the option, reserve part of the money received in the sale for taxes and administrative costs, and deposit the balance in the employee's bank account. An employee who uses this method will thus experience the stock option as a cash deposit.

It's true that the Railroad Retirement Tax Act, in which the term "money remuneration" appears, dates back to 1935, when the nation was mired in the Great Depression of the 1930s which had driven down the value of corporate stock. Maybe stock then wasn't a form of money remuneration, but there is no reason to think that the framers and ratifiers of the Act meant money remuneration to be limited to cash even if, as was eventually to happen, stock became its practical equivalent, just as today 100 dimes is the exact monetary equivalent of a $10 bill. A $10 bill is paper; so is a stock certificate that can be sold for $10. The dictionary definition of money may remain constant while the instruments that comprise it change over time: sheep may have once been a form of money; now stock is. The Internal Revenue Code of 1939 is of limited help here; it treats "money" and "stock" as different concepts, but that's not inconsistent with stock options' falling within "any form of money remuneration."

The equivalence of stock to cash is actually signaled in the statutory exception for qualified stock options, explicitly divorced from "money remuneration" by 26 U.S.C. § 3231(e)(12). That exception, by virtue of its narrowness, supports an inference that non-qualified stock options, which are the options at issue in this case, are covered by the term "money remuneration" and are therefore taxable. There are moreover other statutory exceptions for other forms of non-cash employee benefits, and their existence reinforces the inference that non-qualified stock options are "money remuneration" and therefore taxable. See, e.g., § 3231(e)(1) (excluding payments for health insurance or health care and travel expenses); (e)(5) (excluding non-cash employee achievement awards); (e)(6) (excluding educational benefits); (e)(9) (excluding value of meals and lodging provided to employees); and (e)(10) & (11) (excluding contributions for medical and health savings plans).

The government's position also makes good practical sense by avoiding the creation of a tax incentive that might distort the ways in which employers structure compensation packages for their managers. And finally we are not alone in equating non-qualified stock options to money remuneration in the Railroad Retirement Tax Act. See BNSF Railway Co. v. United States , supra , 775 F.3d at 757 ; CSX Corp., et al. v. United States , No. 3:15–cv–427–BJD–JRK (M.D. Fla. March 14, 2017).

AFFIRMED .

Manion, Circuit Judge, dissenting.

The railroad plaintiffs have sought a tax refund on the ground that stock options they provided to their employees aren't taxable as "compensation" under the Railroad Retirement Tax Act. Compensation under the Act is defined as "any form of money remuneration paid to an individual for services rendered as an employee to one or more employers." 26 U.S.C. § 3231(e)(1). The railroads argue that stock options aren't "money remuneration," so they are not taxable as "compensation" under the Act.

The court disagrees. Although it admits that "[m]aybe stock ... wasn't a form of money remuneration" when the RRTA was enacted, the court posits that "there is no reason to think that the framers and ratifiers of the Act meant money remuneration to be limited to cash" in the event of future economic changes. Maj. Op. at 492. Even if that were true, our job is to interpret the Act as it would have been understood by people at the time it was enacted, not to speculate about the intent of Depression-era legislators. Because the plain language of the statute's definition of "compensation" does not cover stock or stock options, I respectfully dissent.

"It is a ‘fundamental canon of statutory construction’ that, ‘unless otherwise defined, words will be interpreted as taking their ordinary, contemporary, common meaning.’ " Sandifer v. U.S. Steel Corp. , –––U.S. ––––, 134 S.Ct. 870, 876, 187 L.Ed.2d 729 (2014) (quoting Perrin v. United States , 444 U.S. 37, 42, 100 S.Ct. 311, 62 L.Ed.2d 199 (1979) ). "That means we look to the meaning of the word at the time the statute was enacted, often by referring to dictionaries." Jackson v. Blitt & Gaines, P.C. , 833 F.3d 860, 863 (7th Cir. 2016) (citations omitted). There are some "common law statutes" whose meaning may evolve over time, such as the Sherman Antitrust Act. See Leegin Creative Leather Prods., Inc. v. PSKS, Inc. , 551 U.S. 877, 899, 127 S.Ct. 2705, 168 L.Ed.2d 623 (2007). But neither party has argued that the RRTA falls into that category, and the specific contrast Congress drew between it and the Federal Insurance Contributions Act (FICA) belies this contention. Thus, we must interpret the RRTA using normal principles of statutory interpretation, giving effect to the words Congress chose. If the stock options at issue wouldn't have been money remuneration in 1935, neither should they be in 2017.

As the statute is written, it is clear that "money remuneration" does not include stock options. For one, as I alluded to above, "it is well established that RRTA and FICA are parallel statutes." BNSF Ry. Co. v. United States , 775 F.3d 743, 754 (5th Cir. 2015). But they are not identical; they contain different...