LTV Steel Co. Inc. v. US
| Decision Date | 12 June 2000 |
| Parties | (Fed. Cir. 2000) LTV STEEL COMPANY, INC., Plaintiff-Appellee, v. UNITED STATES, Defendant-Appellant. 99-5072 DECIDED: |
| Court | U.S. Court of Appeals — Federal Circuit |
Appealed from: United States Court of Federal Claims, Judge Robert H. Hodges, Jr.
David A. Hickerson, Weil, Gotshal, & Manges LLP, of Washington, DC, argued for plaintiff-appellee. With him on the brief were Mary B. Hevener and Peter D. Isakoff.
Steven W. Parks, Attorney, Appellate Section, Tax Division, Department of Justice, of Washington, DC, argued for defendant-appellant. With him on the brief were Loretta C. Argrett, Assistant Attorney General, and Kenneth Green, Attorney.
Before CLEVENGER, Circuit Judge, FRIEDMAN, Senior Circuit Judge, and BRYSON, Circuit Judge.
The government appeals the ruling of the Court of Federal Claims that pension payments made to certain former employees of the taxpayer's predecessor companies were exempt from tax liability under the Federal Insurance Contributions Act (FICA) and the Federal Unemployment Tax Act (FUTA). We conclude that the payments in question did not qualify for exemption, and we therefore reverse.
Plaintiff LTV Steel Company, Inc., (LTV Steel) is a subsidiary of LTV Corporation. LTV Steel was formed in 1984 from two other LTV Corporation subsidiaries, Republic Steel Corporation and Jones & Laughlin Steel, Inc. Republic Steel Corporation and Jones & Laughlin Steel, Inc., each maintained a defined benefit pension plan for their hourly workers. Those plans were the products of collective bargaining with the United Steelworkers of America. In addition, both Republic Steel Corporation and Jones & Laughlin Steel, Inc., maintained separate defined benefit plans for their salaried workers. All four plans were qualified plans under 26 U.S.C. 401 and therefore were eligible for the benefits of the Employee Retirement Income Security Act of 1974 (ERISA), Pub. L. No. 93-406, 88 Stat. 829.
In 1986, LTV Corporation and 66 of its subsidiaries, including LTV Steel, filed a petition in bankruptcy court for reorganization under Chapter 11 of the Bankruptcy Code. The Pension Benefit Guaranty Corporation (PBGC) thereafter terminated the four pension plans that had paid pension benefits to former employees of Republic Steel Corporation and Jones & Laughlin Steel, Inc. At the time of the terminations, the four plans had unfunded liabilities totaling more than $2 billion. See Pension Benefit Guar. Corp. v. LTV Corp., 496 U.S. 633, 640-41 (1990).
After terminating the plans, the PBGC began paying guaranteed basic benefits to the funds' beneficiaries as the statutory trustee. Those basic benefits were substantially less, on average, than the amounts LTV Steel had been paying to the beneficiaries under the plans themselves.
The Steelworkers union, which represented many of LTV Steel's employees, filed a complaint in the bankruptcy court seeking an injunction to force LTV Steel to make up the lost benefits under the two plans relating to hourly workers and thereby to fulfill its obligations under its 1986 collective bargaining agreement with the union. LTV Steel and the Steelworkers union settled that dispute in 1987. As part of the settlement, the parties agreed to establish the "LTV Steel USWA Pension Plan" effective January 13, 1987. Pursuant to that plan, LTV Steel agreed to make payments to an Individual Account Trust (IAT). Those funds would then be used to pay most of the difference between the basic benefits that the PBGC was paying and the level of benefits required by the two terminated plans for hourly workers. LTV Steel agreed to a similar arrangement for salaried workers, under which the beneficiaries of the two terminated plans for salaried workers would receive payments from a second IAT. Under the two IAT programs, those employees who had retired as of the date of the plan termination would receive payments making up 90-100% of the shortfall in benefits, and those employees who retired after the plans were terminated would receive payments making up about 75% of the shortfall.
LTV Steel established the IATs as nonqualified plans (i.e., the IATs did not qualify as pension trusts under 401 of the Internal Revenue Code, 26 U.S.C. 401). LTV Steel subsequently explained that it had elected to use nonqualified plans to make the payments because of concern about the legality of using qualified plans to make up the shortfall between the benefits that had been provided under the terminated plans and the basic benefits that the PBGC was paying to the terminated plans' beneficiaries. In addition, LTV Steel explained that the payments to the beneficiaries were less than 100% of what was owed under the terminated plans both because LTV Steel did not believe that it would be able to satisfy those obligations in full without jeopardizing its ability to emerge from Chapter 11 and because it feared that payment of the full amount owed to the retirees could jeopardize the continuation of the PBGC's payments to the beneficiaries of the terminated plans.
Despite LTV Steel's efforts to ensure that the PBGC would continue paying basic benefits to the beneficiaries of the terminated plans, the PBGC concluded that the IAT programs established under the 1987 settlement agreements constituted "follow-on" plans. The PBGC therefore directed that three of the four pension plans (all of the plans except the Republic Steel plan for salaried workers) be restored. The PBGC defines a "follow-on" plan as a new benefit arrangement, instituted after the termination of a qualified plan, that supplements the insurance benefits paid by the PBGC so as to provide the beneficiaries of the terminated plan substantially the same benefits they would have received had no termination occurred. The PBGC regards follow-on plans as abusive, because such plans result in the PBGC subsidizing an employer's ongoing pension program in a manner not contemplated by ERISA. See Pension Benefit Guar. Corp. v. LTV Corp., 496 U.S. 633, 642 (1990).
LTV objected to the PBGC's order that it restore the terminated plans, and litigation ensued. Ultimately, the Supreme Court held that the PBGC had properly characterized the IAT programs as follow-on plans, and it ruled that the PBGC was authorized to order restoration of the terminated plans on that basis. See Pension Benefit Guar. Corp., 496 U.S. at 656. Accordingly, LTV Steel restored three of the four terminated plans, as directed by the PBGC, and it resumed making payments to the beneficiaries under those qualified plans. LTV Steel continued making payments to the Republic Steel salaried workers under the IAT program for salaried workers.
For the payments that LTV Steel made under the two IAT programs, LTV Steel paid FICA and FUTA taxes, although LTV Steel maintained that it was not legally required to do so. LTV Steel subsequently filed a claim for a refund of those payments and thereafter filed an action in the Court of Federal Claims seeking a refund of the FICA and FUTA taxes it had paid on the IAT benefit payments. The Court of Federal Claims agreed with LTV Steel and directed the government to refund the FICA and FUTA taxes. The government then took this appeal.
Before 1983, all payments to pension plan beneficiaries were exempt from FICA and FUTA taxes. See 26 U.S.C. 3121(a)(2)(A), (a)(3), (a)(5)(A), (a)(13)(A) (1982). In that year, Congress changed the tax laws so that only qualified plans would continue to be exempt from FICA taxes. See Social Security Amendments of 1983, Pub. L. No. 98-21, 324, 97 Stat. 65, 122 (). The following year, Congress made a parallel change in the tax laws to impose FUTA taxes on benefit payments from nonqualified pension plans. See Deficit Reduction Act of 1984, Pub. L. No. 98-369, 531(d)(1)(A), 98 Stat. 494, 884, 1160.
Although the 1983 and 1984 legislation imposed FICA and FUTA taxes on payments made from nonqualified plans, Congress enacted a "transitional rule," which provided that "in the case of an agreement in existence on March 24, 1983, between a nonqualified deferred compensation plan" and an individual, FICA and FUTA taxes would not be imposed on payments made with respect to services performed before the end of 1983 (for FICA taxes) and 1984 (for FUTA taxes). Social Security Amendments of 1983, Pub. L. No. 98- 21, 324(d)(4), 97 Stat. 65, 126, as amended by the Deficit Reduction Act of 1984, Pub. L. No. 98-369, 2662, 98 Stat. 494, 1160. The Court of Federal Claims ruled that under the transition rule the payments made from the IATs with respect to services performed before 1984 (for FICA taxes) and before 1985 (for FUTA taxes) were exempt from those two taxes.
The government's position is that the transition rule is inapplicable because the payments made under the IAT programs were not made "[i]n the case of an agreement in existence on March 24, 1983." The IAT programs do not qualify as agreements "in existence on March 24, 1983," the government argues, because they were set up in 1987 pursuant to the settlement agreements between LTV Steel, the Steelworkers union, and the LTV Steel retirees. Because the transition rule does not apply, and because the IATs were nonqualified plans, the government concludes that the payments from the IATs are subject to FICA and FUTA taxes.
The Court of Federal Claims rejected that argument on the ground that LTV Steel "had a continuing obligation to pay accrued benefits after PBGC termination," and thus the payments made by the IATs "were made with respect to agreements that were in existence on March 24, 1983." LTV Steel agrees and argues that even though payments from the IATs were not made "pursuant to" a pre-1983 agreement, they were nonetheless made "in the case of" a pre-1983 agreement (the statutory language), because the payments from the IATs were made in...
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