Csx Corp. v. U.S., 2007-5003.

• Decision Date: 06 March 2008
• Docket Number: No. 2007-5007.,No. 2007-5003.,2007-5003.,2007-5007.
• Citation: 518 F.3d 1328
• Parties: CSX CORPORATION, CSX Transportation, Inc., for itself and as successor by merger to The Chesapeake and Ohio Railway Company and as successor by merger to The Baltimore and Ohio Railroad Company, The Baltimore and Ohio Chicago Terminal Railroad Company, and Fruit Growers Express Company, Plaintiffs-Appellants, v. UNITED STATES, Defendant-Cross Appellant.
• Court: U.S. Court of Appeals — Federal Circuit

518 F.3d 1328

CSX CORPORATION, CSX Transportation, Inc., for itself and as successor by merger to The Chesapeake and Ohio Railway Company and as successor by merger to The Baltimore and Ohio Railroad Company, The Baltimore and Ohio Chicago Terminal Railroad Company, and Fruit Growers Express Company, Plaintiffs-Appellants, v. UNITED STATES, Defendant-Cross Appellant.

No. 2007-5003.

No. 2007-5007.

United States Court of Appeals, Federal Circuit.

March 6, 2008.

Stephen N. Shulman, Ivins, Phillips & Barker Chartered, of Washington, DC, argued for plaintiffs-appellants. With him on the brief were David W. Feeney and Burton Spivak, Cadwalader, Wickersham & Taft LLP, of New York, NY.

Kenneth L. Greene, Attorney, Appellate Section, Tax Division, United States Department of Justice, of Washington, DC, argued for defendant-cross appellant. With him on the brief were Richard T. Morrison, Acting Assistant Attorney General, Gilbert S. Rothenberg, Acting Deputy Assistant Attorney General, and Steven W. Parks, Attorney.

Before BRYSON, Circuit Judge, PLAGER, Senior Circuit Judge, and MOORE, Circuit Judge.

BRYSON, Circuit Judge.

This federal tax case calls on us to decide whether payments made to employees by the appellants, an affiliated group of railroad companies that we refer to collectively as CSX, are subject to taxation under the Federal Insurance Contributions Act ("FICA"), 26 U.S.C. §§ 3101-3128, and the Railroad Retirement Tax Act ("RRTA"), id. §§ 3201-3241. The Court of Federal Claims, in a series of three comprehensive opinions, held that certain of the payments at issue were subject to tax and others were not. See 52 Fed.Cl. 208 (2002); 58 Fed.Cl. 341 (2003); 71 Fed. Cl. 630 (2006). We conclude that all the payments at issue were subject to tax, and we therefore affirm in part, reverse in part, and remand for further proceedings.

I

During the 1980s, CSX experienced financial difficulties of the kind that were felt widely throughout the railroad industry. CSX sought to deal with those difficulties in part by reducing the number of its employees. To do so, the company set up a variety of programs, either unilaterally or through agreement with its employee unions. Those programs featured financial arrangements that encouraged employees to separate from the company, while cushioning the effect on employees of the company's reduction in the size of its workforce. The dispute in this case is over the tax consequences of those arrangements for CSX and for the affected employees.

In broad summary, CSX's position is that its payments to employees who were separated from employment or who experienced reduced hours because of the reduction in the company's workforce were not taxable under FICA or the RRTA because they were not "wages" for purposes of FICA, or "compensation" for purposes of the RRTA. See 26 U.S.C. §§ 3121(a), 3231(e). The government's position is that all of the payments to employees and former employees under the plans in question were "wages" or "compensation" within the meaning of FICA and the RRTA. The trial court held that some of the payments in question constituted wages or compensation, while others did not. Both sides have appealed the court's judgment to this court. Both sides agree that the term "wages" in FICA and "compensation" in the RRTA have the same meaning for purposes of the issues in this case. See Treas. Reg. § 31.3231(e)-1(a)(1) ("The term compensation [for purposes of the RRTA] has the same meaning as the term wages in [FICA]."). For that reason, they have focused on the portion of the dispute relating to FICA. The trial court did the same, and so will we.

The dispute in this case turns, to a significant degree, on the definition and tax treatment of a type of employee benefit referred to as supplemental unemployment compensation benefits ("SUB"). SUB benefits were first created in the 1950s as a means for employers to supplement the state unemployment compensation benefits received by their employees who lost their jobs as a result of workforce reductions. Section 3402 of the income tax withholding statutes contains a subsection, 26 U.S.C. § 3402(o), that addresses the application of income tax withholding rules as applied to SUB payments, among other types of benefits. That subsection defines SUB payments as follows:

For purposes of [chapter 24 of the Internal Revenue Code, which deals with income tax withholding], the term "supplemental unemployment compensation benefits" means amounts which are paid to an employee, pursuant to a plan to which the employer is a party, because of an employee's involuntary separation from employment (whether or not such separation is temporary), resulting directly from a reduction in force, the discontinuance of a plant or operation, or other similar conditions, but only to the extent such benefits are includible in the employee's gross income.

Id. § 3402(o)(2)(A). The same subsection then provides that a SUB payment "shall be treated as if it were a payment of wages by an employer to an employee for a payroll period," and as such is subject to withholding for income tax purposes.

An important question in this case, which we address in detail below, is whether the statement in section 3402(o) that a SUB payment "shall be treated as if it were a payment of wages" for income tax withholding purposes necessarily implies that SUB payments are not wages for either income tax or FICA purposes. The trial court answered that question in the affirmative. The court inferred from the language and legislative history of section 3402(o) that Congress regarded SUB payments, as defined in section 3402(o), as non-wages. Applying the general rule that the term "wages" has the same meaning for FICA as for the income tax laws, the court further concluded that the FICA tax obligations that are imposed on payments that constitute "wages" are not imposed on payments that fall within the definition of SUB under section 3402(o). 52 Fed.Cl. at 210-16.

Although the trial court agreed with CSX that SUB payments are not "wages" for purposes of FICA, the court nonetheless rejected CSX's position that all of the disputed payments fell within the definition of SUB payments in section 3402. Instead, the court analyzed each of the payments in dispute and held that some fell within that definition, and thus were not "wages" for employment taxation purposes, and that others fell outside that definition and constituted taxable "wages." 52 Fed.Cl. at 216-21.

The first category of payments addressed by the court were those to CSX employees who were placed into layoff status during CSX's downsizing and were eligible for layoff benefits during the period they were in that status. The amount of the layoff benefit paid to each laid-off employee represented a percentage of the employee's average monthly compensation, and the duration of the period for which the layoff benefit payments were made depended on each employee's length of service. Employees who were not willing to exercise their seniority rights to transfer to other available positions within the plaintiffs' system became ineligible for the continued receipt of those benefits. The lay-off benefit payments, according to the trial court, constituted SUB payments within the meaning of section 3402(o) and therefore were not taxable as "wages" under FICA. 52 Fed.Cl. at 217-18.

A second category of benefit payments addressed by the trial court were those made to employees in groups referred to as "guaranteed extraboards" and "reserve pools." Those were employees whose full-time positions were eliminated but who remained subject to recall on an as-needed basis. Those employees remained on the employer's active service payroll and were guaranteed a certain minimum compensation per pay period, adjusted by the amounts they were paid for work actually performed. The court held that those payments were not SUB payments within the meaning of section 3402(o), because those employees were not separated from employment with the employer. As the trial court explained, "they may have been underemployed, but they were not unemployed." 52 Fed.Cl. at 219.

A third category of payments were those offered to non-managerial employees in exchange for agreeing to terminate their employment. In the case of employees who elected to receive a separation payment in lieu of layoff benefits, the trial court held that the separation payments were SUB payments because for those employees the separation from employment had already taken place when they were laid off. The court explained that those employees were not electing to separate from employment, but were simply electing "to resolve the uncertainty associated with a separation from employment of indefinite duration (i.e., the layoff) in favor of a permanent separation." 52 Fed.Cl. at 220. By contrast, the court held that separation payments made to employees who accepted those payments in lieu of remaining in their existing positions were not SUB payments, because the decision to terminate their employment was theirs, not the employer's, and thus the separation was not "involuntary," as is required by section 3402(o). Those payments constituted wages, the court held, because when the employees relinquished their job-related benefits in favor of a lump-sum payment, the transaction simply amounted to "a redemption, paid in cash, of wage amounts previously paid in kind." 52 Fed.Cl. at 221.

In a separate opinion, the trial court addressed the payments that were made to managerial employees who were terminated in a two-phase process. 58 Fed.Cl. 341. In the first phase, the employees were allowed to elect to separate from employment in return for severance payments. In the second phase, the terminations were involuntary, but they were accompanied by severance payments. The trial court held that the payments made to managerial employees who separated as part of the first phase were not SUB...