North Dakota State University v. U.S.

• Citation: 255 F.3d 599
• Decision Date: 15 February 2001
• Docket Number: CROSS-APPELLEE,CROSS-APPELLANT,00-1546,No. 00-1545,00-1545
• Parties: (8th Cir. 2001) NORTH DAKOTA STATE UNIVERSITY, AN AGENCY OF THE STATE OF NORTH DAKOTA, APPELLEE/, v. UNITED STATES OF AMERICA, APPELLANT/ Submitted:
• Court: United States Courts of Appeals. United States Court of Appeals (8th Circuit)

Page 599

255 F.3d 599 (8th Cir. 2001)

NORTH DAKOTA STATE UNIVERSITY, AN AGENCY OF THE STATE OF NORTH DAKOTA, APPELLEE/ CROSS-APPELLANT, v. UNITED STATES OF AMERICA, APPELLANT/ CROSS-APPELLEE.

No. 00-1545, 00-1546

UNITED STATES COURT OF APPEALS FOR THE EIGHTH CIRCUIT

Submitted: February 15, 2001

Filed: June 18, 2001

Appeals from the United States District Court for the District of North Dakota.

Before Richard S. Arnold and Hansen, Circuit Judges, and Davis, ¹ District Judge.

Hansen, Circuit Judge.

The district court ² entered summary judgment partially in favor of North Dakota State University and partially in favor of the United States in this Federal Insurance Contributions Act (FICA) tax case involving North Dakota State University's early retirement program. The district court determined that payments to tenured faculty under the program were not wages within the FICA definition of wages but that payments to high-level administrators under the program were wages subject to FICA taxation. The United States appeals the decision regarding the tenured faculty and North Dakota State University cross-appeals the decision regarding the administrators, to the extent it applies to those administrators who North Dakota State University asserts also had tenure rights. We affirm. ³

I.

The material facts are generally undisputed in this case disposed of on cross motions for summary judgment. North Dakota State University (hereinafter "NDSU") offered an Early Retirement Program to tenured faculty and to certain high-level administrators whose age and years of service totaled 70 (or 65 during some periods of time). Participation in the program was voluntary by both parties-neither the employee nor NDSU could force the other to enter into an Early Retirement Agreement. Once they agreed to enter into an Early Retirement Agreement, NDSU and the employee negotiated the payment amount. The payment was capped at 100% of the employee's most recent annual salary, but the prospective retiree was not automatically entitled to the full amount. Various factors were considered in setting the retirement payment, including past performance, current salary, curriculum needs, and budget restraints. These were not the only factors considered during the negotiations; in fact, there was no restriction on the factors that could be considered. Under the Early Retirement Agreement, the employee agreed to give up any tenure, contract, and/or other employment rights, agreed not to seek employment with a North Dakota public university or college, and agreed to give up any claim against NDSU under the Age Discrimination in Employment Act.

The Early Retirement Program was available to faculty who had received tenure. Tenure was granted to a faculty member upon recommendation by NDSU to the North Dakota Board of Higher Education (the Board), which made the final tenure decision. NDSU had a tenure track of six years, during which time faculty members were evaluated annually. The six-year track was not set in stone, however, and occasionally tenure was granted earlier, even upon hire. Under NDSU and Board policy, the six-year probationary period could be waived for faculty having tenure at another university or having a record of outstanding achievement. The Board considered various factors in making tenure decisions, including scholarship in teaching, contribution to a discipline or profession through research, other scholarly or professional activities, and service to the institution and society.

Tenure was not a right that could be demanded by a professor. Once tenure was granted, however, tenure gave the professor the right to continuous academic year employment in the specific program area for which the tenure was granted. The annual tenure contracts were automatically renewed each year unless termination was permitted under the policies. Under the terms of the tenure program, which were non-negotiable, a tenured faculty member could be terminated based upon various fiscal reasons, including a demonstrably bona fide financial exigency, loss of legislative appropriations, loss of institutional or program enrollment, consolidation of academic units or program areas, or elimination of courses. Additionally, tenured faculty could be terminated for adequate cause, which was defined as demonstrated incompetence or dishonesty in teaching, research, or other professional activities; continued or repeated unsatisfactory performance evaluations; substantial and manifest neglect of duty; conduct which substantially impaired fulfillment of responsibilities; physical or mental inabilities to perform duties; and continued violations of NDSU or Board policies. Absent fiscal constraints or adequate cause, a tenured faculty member could not be terminated. The tenure policies required that specific due process rights and procedures be afforded a tenured faculty before any termination.

Certain high-level administrators were also eligible to participate in the Early Retirement Program, including "the president, vice presidents, deans and officers of the institution who [we]re members of TIAA/CREF, TFFR and TIRF." (NDSU policy § 360, Appellant's App. at 14.) These administrators had certain employment rights pursuant to NDSU and Board policy, including a right to extended notice before dismissal, depending on the administrator's length of employment. Three months notice was required during the administrator's first year, six months during the second year, and twelve months notice thereafter. Upon compliance with the early notice provisions, the administrators could be terminated without cause. (NDSU policy § 183, Appellant's App. at 69-70).

Prior to 1991, NDSU withheld the employee's portion of FICA taxes from Early Retirement Program payments and paid its employer's share of FICA taxes. During 1991, some Early Retirement Program participants questioned NDSU's payroll department about the applicability of FICA taxes to the payments. Both NDSU's payroll director and general counsel researched the issue by reviewing privately published tax law treatises and attempting to contact the Internal Revenue Service (IRS) and the Social Security Administration (SSA). ⁴ NDSU posed a question to the SSA concerning whether NDSU's "Tenure Buy-Out Program," under which "an employee is offered a sum of money to sell their Tenure back to the University," is considered wages for FICA purposes. (Appellant's App. at 83.) The SSA responded in a letter stating that, as described by NDSU, the program was "in effect, a payment to secure the release of an unexpired contract of employment," and as such, under the Social Security Procedure Operations Manuals, was not considered wages for purposes of determining benefit amounts or for deduction of benefits purposes. (Id.) Based on the SSA letter, and without seeking further outside advice or a private letter ruling from the IRS, NDSU stopped both withholding and paying FICA taxes on the Early Retirement Program payments.

The IRS audited NDSU on June 22, 1995, and assessed deficiencies in FICA taxes for the years 1991 through 1994 with respect to the Early Retirement Program payments. NDSU paid the assessment and thereafter began withholding and paying FICA taxes on the early retirement payments. NDSU later filed for a refund of the FICA taxes for the periods of 1991 through 1997. Upon denial of the refund claim, NDSU filed this suit.

The district court determined that the payments to the administrators were wages subject to FICA taxation because the administrators were at-will employees, subject only to the extended notice provisions. Because the payments were based on factors traditionally used to determine compensation, the district court found that the payments were wages for FICA purposes. The district court treated the tenured faculty members differently, however, because the faculty had a recognized property interest in their tenure. The district court concluded that the payments to tenured faculty were made in exchange for the relinquishment of a property or contract interest rather than for compensation and as such were not subject to FICA taxation. The United States appeals the ruling regarding the tenured faculty. Counsel for NDSU clarified at oral argument that NDSU is appealing the ruling only to the extent that payments made to administrators who NDSU alleges also had tenure rights were deemed wages for FICA purposes. NDSU concedes that nontenured administrators were at-will employees and subject to FICA taxation. We affirm.

II.

We review summary judgment dismissals de novo, applying the same standard as the district court. See Melvin v. Yale Indus. Prods., Inc., 197 F.3d 944, 946-47 (8th Cir. 1999). Tax assessments made by the IRS are presumed correct and the taxpayer bears the burden of proving, by a preponderance of the evidence, that the assessment is erroneous. See Boles Trucking, Inc. v. United States, 77 F.3d 236, 239 (8th Cir. 1996). The crux of this case is whether payments made to tenured faculty, in exchange for which the tenured faculty gave up their tenure rights, are subject to FICA taxes as defined by the Internal Revenue Code. This is, we believe, an issue of first impression in the federal circuit courts. ⁵

The Internal Revenue Code imposes FICA taxes on "wages" received by an employee "with respect to employment." Internal Revenue Code (I.R.C.) 3101, 26 U.S.C. 3101. The employer is required to withhold FICA taxes from the employee's wages and is required to pay an equal amount itself as an employment tax. See I.R.C. 3102, 3111. The term "wages" is defined for FICA purposes as "all remuneration for employment" with enumerated exceptions, none of which apply to this case. I.R.C. 3121(a). "Employment" is defined as "any service, of whatever nature, performed by an employee for the person employing him." I.R.C. 3121(b). These terms "are worded so as to 'import breadth of coverage,'" Mayberry v....