Munoz v. Norfolk S. Ry. Co.
| Decision Date | 05 June 2018 |
| Docket Number | No. 1–17–1009,1–17–1009 |
| Citation | 2018 IL App (1st) 171009,121 N.E.3d 899,428 Ill.Dec. 125 |
| Parties | Rafael MUNOZ, Plaintiff–Appellee, v. NORFOLK SOUTHERN RAILWAY COMPANY, Defendant–Appellant. |
| Court | United States Appellate Court of Illinois |
¶ 1 Rafael Munoz, a railroad freight conductor, sued his employer, Norfolk Southern Railway Company, under the Federal Employee Liability Act (FELA), claiming negligence for injuries he incurred at work. A jury awarded Munoz $821,000, including $310,000 for past and future lost wages. After the verdict, Norfolk moved for a setoff, claiming Munoz owed taxes on the lost wages under the Railroad Retirement Tax Act (RRTA). The RRTA funds railroad employees' retirement benefits provided by the Railroad Retirement Act (RRA). The trial court denied the motion, relying on cases holding that, like personal injury judgments under section 104(a)(2) of the Internal Revenue Code ( I.R.C. § 104(a)(2) (2012) ), the RRTA does not require employers to withhold taxes for FELA personal injury awards.
¶ 2 Norfolk argues that, because the RRTA funds the RRA, they should be read together, which would make a FELA award for lost wages taxable "compensation" subject to a withholding tax. Alternatively, Norfolk contends that if we conclude the applicable RRTA language to be ambiguous, we should look to IRS regulations, which have interpreted "compensation" in the RRTA to include payments for lost wages. Moreover, Norfolk asserts that section 104(a)(2) of the Internal Revenue Code only applies to nonrailroad employees' personal injury awards.
¶ 3 Munoz counters that taxes should not be imposed, as the plain language and legislative history of the RRTA unambiguously exclude a lost-wages award from the definition of "compensation." Alternatively, Munoz asserts that section 104(a)(2) of the Internal Revenue Code, which removes personal injury awards from taxable income, embraces not taxing lost wages awards under the RRTA.
¶ 4 We reject Norfolk's challenge. The RRTA defines "compensation" as money paid to an employee for "services rendered." Lost wages cannot be paid to an employee for "services rendered." And, under the test in 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), we ignore agency regulations for clarification where, as here, the statutory language provides an unambiguous expression of congressional intent.
¶ 6 Rafael Munoz injured his shoulder and neck when a train he was working on in Norfolk's Calumet Yard came to a sudden stop. Munoz sued Norfolk for negligence under the Federal Employers' Liability Act (FELA) ( 45 U.S.C. § 51 et seq. (2012) ), and sought damages for lost wages, medical bills, loss of future earning capacity, and pain and suffering. Norfolk admitted liability, leaving damages as the only issue. Norfolk asserted in a trial brief that any lost-earnings award must be offset by Munoz's share of RRTA taxes, which, under the RRA, fund railroad employees' retirement benefits. The court did not address the issue at that time.
¶ 7 The trial court instructed the jury, in part, "If you find for the Plaintiff, any damages you award will not be subject to income taxes and therefore you should not consider taxes in fixing the amount of the verdict." The jury returned a verdict in Munoz's favor, awarding him $821,000 in damages, including $310,000 for past and future lost wages.
¶ 8 Norfolk filed a posttrial motion arguing it had a $14,560.79 statutory lien on the verdict for "sickness benefits" it paid Munoz and asking for a $16,610.23 set-off from Munoz's $310,000 lost-wages award for his share of RRTA taxes. Munoz did not contest the lien for sickness benefits; however, as to his lost-wages portion, Munoz contended lost wages should be treated no differently under the RRTA than other personal injury awards, which are not subject to income tax withholding under the Internal Revenue Code. See I.R.C. § 104(a)(2) (2012) ().
¶ 9 At a hearing on the motion, Norfolk cited state court rulings that held a railroad's payment on a judgment for lost wages equated to "compensation" subject to withholding taxes under the RRTA, including decisions from Nebraska ( Heckman v. Burlington Northern Santa Fe Ry. Co. , 286 Neb. 453, 837 N.W.2d 532 (2013) ), Iowa (Phillips v. Chicago Central & Pacific R.R. Co. , 853 N.W.2d 636 (Iowa 2014) ), and Pennsylvania ( Liberatore v. Monongahela Ry. Co. , 2016 PA Super 79, 140 A.3d 16 ). The trial court, however, followed the Missouri Supreme Court in Mickey v. BNSF Ry. Co. , 437 S.W.3d 207, 212 (Mo. 2014), which held in part that, like the exclusion for personal injury awards under Internal Revenue Code section 104(a)(2), a FELA lost-wages award does not constitute income and, therefore, does not qualify as taxable "compensation" under the RRTA. The court also favorably cited Loy v. Norfolk Southern Ry. Co. , No. 3:12-CV-96-TLS, 2016 WL 1425952, at *5 (N.D. Ind. Apr. 12, 2016), an unpublished federal district court opinion that adopted a similar reasoning, finding that an injured employee's damage award was "almost by definition personal" and falls under the section 104(a)(2) exclusion.
¶ 11 Norfolk contends the RRTA is not ambiguous, asserting that the plain language of the RRTA, when read in conjunction with the RRA, supports a finding that a FELA lost-wages award is compensation subject to withholding taxes. Alternatively, Norfolk asserts that if we determine that the RRTA language is ambiguous, we should look to IRS regulations and RRA information notices, which support withholding.
¶ 12 Before turning to the primary issue, we address a contention of amicus the Academy of Rail Labor Attorneys (ARLA). According to the ARLA, Norfolk waived its right to a setoff by failing to object when the trial court instructed the jury that it should not consider income taxes in determining Munoz's lost-wages award. The ARLA asserts that under Illinois Supreme Court Rule 239(b) (eff. Apr. 8, 2013), Norfolk had to object to the instruction during the jury instruction conference on grounds that were "particularly specified." Norfolk did not do so, and ARLA argues that Norfolk cannot raise the issue now, as "[n]o party may raise on appeal the failure to give an instruction unless the party shall have tendered it." Ill. S. Ct. R. 366(b)(2)(i) (eff. Feb. 1, 1994).
¶ 13 We reject ARLA's assertion. In a FELA action, it is reversible error for a state trial court to refuse to give the requested instruction on the taxability of damages. Norfolk & Western Ry. Co. v. Liepelt , 444 U.S. 490, 498, 100 S.Ct. 755, 62 L.Ed.2d 689 (1980) ; see also Argueta v. Baltimore & Ohio Chicago Terminal R.R. Co. , 224 Ill. App. 3d 11, 18, 166 Ill.Dec. 428, 586 N.E.2d 386 (1991) (). So the trial court correctly gave the instruction.
¶ 14 Moreover, Norfolk did not waive the issue. Norfolk's trial brief argued that any judgment for lost earnings should be offset by Munoz's share of RRTA taxes. Munoz acknowledged as much in his motion to strike Norfolk's affirmative defenses, stating that, if he recovered, "the proper pleading, if any, would be a motion post-recovery for an offset to the judgment for any amount that may be recoverable to the [Railroad Retirement Board]."
¶ 16 Whether withholding taxes under the RRTA applies to a FELA award presents an issue of first impression in Illinois. As this question requires interpretation of federal statutory provisions, a question of law, we apply a de novo standard of review. State Bank of Cherry v. CGB Enterprises, Inc. , 2013 IL 113836, ¶ 22, 368 Ill.Dec. 503, 984 N.E.2d 449.
¶ 17 We begin with background on the applicable federal statutes. In 1908, Congress, responding to the rising toll of serious injuries and death to railroad workers, enacted the Federal Employer Liability Act (FELA). That year 281,645 railroad workers were injured or killed on the job. CSX Transportation, Inc. v. McBride , 564 U.S 685, 691, 131 S.Ct. 2630, 180 L.Ed.2d 637 (2011) ; see also Jeffrey R. White, The Taxman Cometh to Your FELA Judgment , 50–APR Trial 16, 18 (2014). FELA provides railroad workers a statutory negligence cause of action against their railroad employers, with a right to a jury trial. State and federal courts have concurrent jurisdiction over FELA actions. 45 U.S.C. § 56 (2012). In state court, state procedural law and federal substantive law govern a FELA action. St. Louis Southwestern Ry. Co. v. Dickerson , 470 U.S. 409, 411, 105 S.Ct. 1347, 84 L.Ed.2d 303 (1985).
¶ 18 In addition, Congress enacted legislation to provide railroad employees a separate retirement and disability benefits system. Instead of Social Security benefits, railroad employees participate in a pension system under the RRA ( 45 U.S.C. §§ 231 – 231v (2012) ), adopted in 1934. Hisquierdo v. Hisquierdo , 439 U.S. 572, 573, 99 S.Ct. 802, 59 L.Ed.2d 1 (1979). RRA benefits consist of two tiers. Tier 1 benefits are the railroad equivalent of Social Security benefits. 45 U.S.C. § 231b(a) (2012) ; Hisquierdo , 439 U.S. at 574–75, 99 S.Ct. 802. Tier 2 benefits are a "supplemental annuity" based on years of service and the employee's compensation. 45 U.S.C. § 231b(b) (2012).
¶ 19 Taxes imposed under the RRTA, which is part of the Internal Revenue Code, fund RRA benefits. Hance v. Norfolk Southern Ry. Co. , 571 F.3d 511, 522 (6th Cir. 2009). Tier 1 taxes " ‘are analogous to taxes imposed on nonrailroad workers by the Federal Insurance Contributions Act (F...
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