Phillips v. Chi. Cent. & Pac. R.R. Co., 13–0729.

Decision Date27 June 2014
Docket NumberNo. 13–0729.,13–0729.
Citation853 N.W.2d 636
PartiesRussell PHILLIPS, Appellant, v. CHICAGO CENTRAL & PACIFIC RAILROAD COMPANY, a Delaware Corporation, Appellee.
CourtIowa Supreme Court

Richard D. Crotty, Council Bluffs, and Christopher W. Bowman of Yaeger, Jungbauer & Barczak, P.L.C., St. Paul, Minnesota, for appellant.

R. Todd Gaffney, Kellen B. Bubach, and Eric G. Hoch of Finley, Alt, Smith, Scharnberg, Craig, Hilmes & Gaffney, P.C., Des Moines, for appellee.

Nicholas A. Klinefeldt, United States Attorney, and William C. Purdy, Assistant United States Attorney, and Marion E.M. Erickson and Jonathan S. Cohen, Washington, D.C., for amicus curiae United States of America.

Opinion

APPEL, Justice.

In this case, we must determine the tax consequences of a general verdict under the Federal Employers' Liability Act (FELA), 45 U.S.C. §§ 51 –60 (2006). A railroad employee filed a negligence action against a railroad and obtained a favorable general jury verdict. The employer withheld a portion of the subsequent award to pay taxes allegedly due under the Railroad Retirement Tax Act (RRTA), 26 U.S.C. §§ 3201 –3241, and paid the balance to the employee. When the employee refused to sign a satisfaction of judgment, the railroad sought an order of satisfaction from the district court.

The employee resisted the motion for an order of satisfaction on several grounds. First, the employee claimed an award for “time lost” was not taxable compensation under the RRTA. Second, the employee claimed that even if compensation for time lost is taxable, because there is no way to determine the portion of the general verdict allocable to lost income, the employer was not entitled to withhold any amount for payment of taxes. Finally, the employee claimed that the railroad had not fully satisfied the judgment.

The district court ruled in favor of the railroad. The employee appeals. For the reasons expressed below, we affirm.

I. Factual and Procedural Background.

Russell Phillips was an employee of the Chicago Central & Pacific Railroad. His last day of work was in April of 2008. During the last three years of his employment, Phillips was diagnosed with a number of conditions, including chronic bursitis of the shoulder ; acute and chronic degenerative osteoarthritis of the cervical, thoracic, and lumbosacral spine; shoulder sprain /strain; acute ulnar neuropathy ; acquired chronic spondylolisthesis ; rotator cuff disease on the right shoulder; and bilateral carpal tunnel syndrome.

In October 2008, Phillips filed a claim against the railroad under FELA. Phillips alleged that while employed by the railroad he was injured as a result of the railroad's negligence in failing to provide him with a safe workplace and in failing to provide him with reasonably safe equipment. Phillips sought a wide variety of damages, including damages for lost past and future wages. The jury was instructed to consider whether Phillips was entitled to recover damages for medical expenses, lost wages, future earning capacity, loss of bodily functions, and physical and mental pain and suffering.

The jury returned a general verdict in favor of Phillips in the amount of $940,905.10. Because the jury found Phillips eighty percent at fault for his injuries, the district court entered judgment in favor of Phillips in the amount of $188,181.02 plus interest. The railroad paid Phillips the amount of the judgment less $10,546.92, which it withheld for payment to the Internal Revenue Service (IRS) under the RRTA.

When the railroad requested Phillips execute a satisfaction of judgment, he refused to sign on the ground the railroad should not have withheld any amount for tax purposes. In response, the railroad filed a motion with the district court for an order of satisfaction and discharge of judgment.

The district court sustained the railroad's motion for satisfaction and discharge of judgment. According to the district court, the sole issue before it was whether an employer may withhold a portion of a plaintiff's general verdict award to pay the RRTA payroll taxes. In order to answer this general question, the district court made two conclusions. First, the district court concluded payments for time lost amounted to taxable compensation for the purposes of the RRTA. Second, the district court concluded a general verdict is considered pay for time lost in its entirety under the RRTA unless part of the award is specifically allocated to other factors.

II. Discussion.

A. Overview of Applicable Statutory and Administrative Framework. We begin our discussion with an overview of the applicable statutory and administrative framework. The Railroad Retirement Act

(RRA) of 1974, 45 U.S.C. §§ 231 –231v, provides a system of retirement and disability benefits for those who pursue careers in the railroad industry. Hisquierdo v. Hisquierdo, 439 U.S. 572, 573, 99 S.Ct. 802, 804, 59 L.Ed.2d 1, 6 (1979). The Railroad Retirement Board (RRB) administers the RRA benefits. 45 U.S.C. § 231f(a). Generally, the RRA applies to railroad companies and their employees. See 45 U.S.C. § 231(a)(1)(2) (defining “employer”); id. § 231(b)(1)(2) (defining “employee”).

Taxes collected under the RRTA fund certain RRA benefits, or as one court put it, the RRA represents “the expenditure side of the coin” and the RRTA “is the revenue side.” Standard Office Bldg. Corp. v. United States, 819 F.2d 1371, 1373 (7th Cir.1987) ; see Hisquierdo, 439 U.S. at 574 & n. 2, 99 S.Ct. at 804 & n. 2, 59 L.Ed.2d at 6 & n. 2. Under the RRTA, both railroad employees and their employers pay a tax to the IRS. See 26 U.S.C. § 3201 (tax on employees); id. § 3221 (tax on employers). Thus, the RRTA “is to the railroad industry what the Social Security Act is to other industries: the imposition of an employment or payroll tax on both the employer and the employee, with the proceeds used to pay pensions and other benefits.” Standard Office Bldg. Corp., 819 F.2d at 1373.

The RRTA provides that employers must collect applicable taxes “by deducting the amount of the taxes from the compensation of the employee as and when paid.” 26 U.S.C. § 3202(a). The RRTA imposes two tiers of taxation on compensation earned by railroad workers. See id. § 3201. Tier 1 taxes under the RRTA fund benefits corresponding to Social Security and Medicare benefits and are calculated using the applicable Social Security and Medicare tax formulas. See id. § 3201(a) ; see also id. § 3101(a)(b); Hisquierdo, 439 U.S. at 574, 99 S.Ct. at 804–05, 59 L.Ed.2d at 6. Tier 2 taxes fund a separate annuity that is equivalent to a private pension benefit.See 26 U.S.C. § 3201(b) ; Heckman v. Burlington N. Santa Fe Ry., 286 Neb. 453, 837 N.W.2d 532, 539 (2013) ; see also Hisquierdo, 439 U.S. at 574–75, 99 S.Ct. at 804–05, 59 L.Ed.2d at 6–7 ; Bowman v. Stumbo, 735 F.2d 192, 196 n. 7 (6th Cir.1984) ; Atchison, Topeka & Santa Fe Ry. v. United States, 628 F.Supp. 1431, 1433 (D.Kan.1986).

The RRA and the RRTA employ different definitions of “compensation.” The RRA's definition specifically includes payments for time lost. See 45 U.S.C. § 231(h)(1). It provides:

The term “compensation” means any form of money remuneration paid to an individual for services rendered as an employee to one or more employers or as an employee representative, including remuneration paid for time lost as an employee, but remuneration paid for time lost shall be deemed earned in the month in which such time is lost.

Id. (emphasis added). The RRA also addresses whether payments for personal injury are considered compensation and how to calculate the amount of a payment that is considered compensation for time lost. See id. § 231(h)(2). The RRA provides:

An employee shall be deemed to be paid “for time lost” the amount he is paid by an employer with respect to an identifiable period of absence from the active service of the employer, including on account of personal injury.... If a payment is made by an employer with respect to a personal injury and includes pay for time lost, the total payment shall be deemed to be paid for time lost unless, at the time of payment, a part of such payment is specifically apportioned to factors other than time lost, in which event only such part of the payment as is not so apportioned shall be deemed to be paid for time lost.

Id. (emphasis added).

The RRTA employs a different definition of compensation. See 26 U.S.C. § 3231(e). In pertinent part, the RRTA defines compensation generally as: “any form of money remuneration paid to an individual for services rendered as an employee to one or more employers.” Id. Thus, unlike the RRA, the RRTA does not currently explicitly address the tax consequences of remuneration for time lost.

Though the RRTA does not explicitly address the tax consequences of remuneration for time lost, it did prior to amendments in 1975 and 1983. Before these amendments, the RRTA defined compensation in a fashion similar to the current definition in the RRA. The RRTA formerly provided:

(1) The term “compensation” means any form of money remuneration earned by an individual for services rendered as an employee to one or more employers, or as an employee representative, including remuneration paid for time lost as an employee, but remuneration paid for time lost shall be deemed earned in the month in which such time is lost....
(2) A payment made by an employer to an individual through the employer's payroll shall be presumed, in the absence of evidence to the contrary, to be compensation for service rendered by such individual as an employee of the employer in the period with respect to which the payment is made. An employee shall be deemed to be paid “for time lost” the amount he is paid by an employer with respect to an identifiable period of absence from the active service of the employer, including absence on account of personal injury, and the amount he is paid by the employer for loss of earnings resulting from his displacement to a
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