BNSF Ry. Co. v. United States
| Citation | 904 F.Supp.2d 604 |
| Decision Date | 25 October 2012 |
| Docket Number | No. 4:11–CV–455–A.,4:11–CV–455–A. |
| Parties | BNSF RAILWAY COMPANY, Plaintiff, v. UNITED STATES of America, Defendant. |
| Court | U.S. District Court — Northern District of Texas |
OPINION TEXT STARTS HERE
Mary B. Hevener, Robert R. Martinelli, Steven P. Johnson, Morgan Lewis & Bockius LLP, Washington, DC, Ellen L. Perlioni, Morgan Lewis & Bockius LLP, Dallas, TX, William F. Colgin, Jr., Morgan, Lewis & Bockius LLP, Palo Alto, CA, for Plaintiff.
Stephanie M. Page, Curtis C. Smith, US Department of Justice, Tax Division, Dallas, TX, for Defendant.
Before the court for decision are cross motions for summary judgment filed by plaintiff, BNSF Railway Company (“BNSF”), and defendant, United States of America. The court has concluded that BNSF's motion should be granted and the government's denied.
This action was initiated on June 30, 2011, by the filing by BNSF, as plaintiff, of its Complaint seeking a refund from defendant, United States of America, of taxes plaintiff and its predecessors and affected employees paid to the Internal Revenue Service (“IRS”) pursuant to the Railroad Retirement Tax Act, 26 U.S.C. §§ 3201–3214, (“RRTA”) for the tax periods 1993 through 1998. BNSF, which formerly was named “The Burlington Northern and Santa Fe Railway Company,” is the successor of the merger of Burlington Northern Railroad Company (“BNRR”) and The Atchison Topeka and Santa Fe Railway Company (“ATSF”).
BNSF's live pleading is an amended complaint it filed July 18, 2012, which United States answered July 31, 2012. BNSF seeks refunds of two categories of tax payments: The first are payments BNRR made for the tax years 1993, 1994, and 1995, ATSF made for the tax years 1994 and 1995, and BNSF made for the tax years 1996, 1997, and 1998 with respect to financial gains realized by their respective employees from the exercise by the employees of non-qualified stock options (“NQSOs”) they had received as part of their benefits of employment, 1 and the second are payments BNRR made for the 1994 and 1995 tax years, ATSF made for the 1994 and 1995 tax years, and BNSF made for the 1996, 1997, and 1998 tax years with respect to moving and relocation expense benefits (“relocation benefits”) received by their respective employees. 2 The total of the refunds sought by BNSF as to the NQSO tax payments is $16,432,583.01 ($9,077,244.45, the employer portion; $7,355,338.56, the employee portion), and as to the relocation benefits tax payments is $5,603,294.08 ($1,068,633.71, the employer portion; $4,534,660.37, the employee portion).
While the parties cite other statutory provisions in support of statutory construction arguments, the statutory provisions directly pertinent to the decisions to be made by the court are §§ 3201 and 3231(e) of Title 26, United States Code. Section 3201 imposes a tax on the income of each railroad employee “equal to the applicable percentage of the compensation received during any calendar year by such employee for services rendered by such employee.” 26 U.S.C. § 3201 (emphasis added). The term “compensation” is defined in § 3231(e) to mean “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) (emphasis added). That definition is followed by a listing of things that are not included in the term “compensation.” One of the listed exclusions is
an amount paid specifically—either as an advance, as reimbursement or allowance—for traveling or other bona fide and necessary expenses incurred or reasonably expected to be incurred in the business of the employer provided any such payment is identified by the employer either by a separate payment or by specifically indicating the separate amounts where both wages and expense reimbursement or allowance are combined in a single payment.
26 U.S.C. § 3231(e)(1)(iii) (emphasis added).
On September 27, 2012, the parties jointly filed a proposed pretrial order in which they agreed that the court has jurisdiction over all of BNSF's claims other than BNSF's claims for refund with respect to relocation benefits for the years 1996 and 1997. The court accepted and signed the proposed pretrial order as a presentation by the parties of a joint definition of the claims of the parties, stipulations of the parties, and joint identification by the parties of contested issues of fact and issues of law. The parties jointly suggested in the pretrial order that “this case can be fully resolved on the cross-motions for summary judgment” and that “trial is unnecessary.” Pretrial Order at 2, ¶ 2. To that end, the parties jointly stated, with specificity, the contentions of each party, following which the parties provided stipulations of fact,3 apparently with the intent that there be no issue of fact to be resolved and that the disposition of the case will turn on pure legal issues, thus allowing for summary disposition on the cross-motions for summary judgment.
The facts to which the parties stipulated in the pretrial order included the following:
Non-qualified Stock Options
1. Plaintiff paid the following amounts of RRTA taxes with respect to Plaintiff's employees' exercises of NQSOs:
2. Plaintiff properly and timely filed: (a) administrative refund claims with the Internal Revenue Service; and (b) this instant action with respect to the above claims.
3. In general, a stock option is a contract whereby the employer promises to deliver to the optionee employee shares of its stock upon exercise at the grant price.
4. Both Incentive stock options (ISOs) and NQSOs allow employees to purchase a stated number of shares of stock at a fixed price for a specified period of time.
5. During the years at issue, Plaintiff provided salaried employees with both incentive stock options (ISO) and non-qualified stock options (NQSO) pursuant to certain incentive stock option plans.
6. The stock options could be awarded as ISOs (nontaxable upon exercise for purposes of federal income tax) or NQSOs (stock options that did not qualify for ISO treatment). The stock options at issue in this suit are solely NQSOs.
7. In the years at issue, Plaintiff's board of directors and compensation committee determined the amount of stock options that would be granted to Plaintiff's employees pursuant to the applicable incentive stock option plans.
8. The stated purpose of these plans was to ensure that the employees were paid a competitive compensation package. While the average salary paid to its employees was below average in the industry, the overall compensation was above-average after taking into account the payment of stock options.
9. The Committee was authorized to specify both the final deadline for exercising stock options (which, according to the stock option plans, could be as long as 10 years after the grant of the option), and the vesting period applicable to each option grant, which governed the period of time that the employee was required to remain with the company before the option could be exercised. If the employee decided to exercise his stock option, he would pay the price for the share of stock that was the market price of the stock on the day the stock option was granted, and would typically sell it for the stock's market price on the day of the exercise.
10. In 90–95% of the stock options exercised the employee would receive a payment from First Chicago, BNSF's transfer agent, for the difference between the strike price and exercise price (the taxable amount) the same day.
11. Plaintiff was a publicly traded company during the periods at issue. The stock option exercises at issue concern stock that was publicly traded on the New York Stock Exchange during the periods at issue.
12. Plaintiff's employees could exercise an option for as many shares as had been awarded per the option grant. The employee's status as an executive or a non-executive governed certain procedures by which the exercise could be accomplished. Executive level employees were authorized to exercise an option through a private broker, who would inform Plaintiff's compensation department that the employee had exercised a certain number of shares under a certain stock plan as of a stated date. The broker would also identify the method of exercise the employee had selected. Non-executive level employees faxed or hand-delivered an exercise notification sheet to Plaintiff's compensation...
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