Wis. Cent. Ltd. v. United States

Decision Date08 July 2016
Docket Number14 C 10243, 14 C 10244, 14 C 10246
Citation194 F.Supp.3d 728
Parties WISCONSIN CENTRAL LTD., Plaintiff, v. UNITED STATES of America, Defendant. Grand Trunk Western Railroad Company, Plaintiff, v. United States of America, Defendant. Illinois Central Railroad Company, Plaintiff, v. United States of America, Defendant.
CourtU.S. District Court — Northern District of Illinois

William J. McKenna, Jr., Foley & Lardner, Chicago, IL, for Plaintiff.

Noreene C. Stehlik, United States Department of Justice, Washington, DC, AUSA, Prashant Kolluri, United States Attorney's Office, Chicago, IL, for Defendant.


Gary Feinerman, United States District Judge

In these consolidated and materially identical suits, Plaintiffs Wisconsin Central Ltd., Grand Trunk Western Railroad Company, and Illinois Central Railroad Company seek refunds for allegedly overpaid federal employment taxes under the Railroad Retirement Tax Act ("RRTA"), 26 U.S.C. §§ 3201 -3241. Doc. 1. (Unless indicated otherwise, all docket numbers refer to Wisconsin Central Ltd. v. United States of America , No. 14 C 10243). The parties filed cross-motions for summary judgment on a set of stipulated facts. Docs. 23, 25. Plaintiffs' motions are denied and the Government's motions are granted.


The parties agree that the court should rely on a jointly submitted set of stipulated facts in deciding the summary judgment motions. Doc. 22 at 2; see Hayden ex rel. A.H. v. Greensburg Cmty. Sch. Corp. , 743 F.3d 569, 573 (7th Cir.2014) ; Hess v. Hartford Life & Accident Ins. Co. , 274 F.3d 456, 461 (7th Cir.2001) ; Mkt. Street Assocs. L.P. v. Frey , 941 F.2d 588, 590 (7th Cir.1991). Plaintiffs are rail carriers as defined by the RRTA, 26 U.S.C. § 3231(g). Doc. 22 at ¶ 6. Plaintiffs have significant railroad operations in the Midwest and Mississippi Valley, and are indirect wholly owned subsidiaries of Canadian National Railway Company. Id. at ¶¶ 8-9.

This case concerns the tax years 2006 through 2013. Id. at ¶¶ 3, 22. During that time, pursuant to Canadian National's Management Long-Term Incentive Plan and Illinois Central's Executive Performance Compensation Program, Plaintiffs granted options of Canadian National stock to certain employees. Id. at ¶¶ 22, 26(a), 29(c). The options were "nonqualified" stock options, meaning that they were not incentive stock options as defined in 26 U.S.C. § 422(b) or part of an employee stock purchase plan as defined in 26 U.S.C. § 423(b), which in turn means that they were not "qualified stock options" as defined in the RRTA, 26 U.S.C. § 3231(e)(12). Id. at ¶ 22. Each option gave the employee the right to purchase one share of Canadian National stock at a fixed price equal to the stock's publicly traded price on the date of the option grant ("exercise price"). Id. at ¶ 23(a). If an option was not exercised within a ten-year term, or possibly earlier if an employee retired or died, it expired. Id. at ¶¶ 23(a), 26(f). (The options of any employee dismissed for cause or who voluntarily left Plaintiffs expired immediately. Id. at ¶ 26(f).) Twenty-seven percent of the options exercised from 2006-2013 were "performance" options, exercisable only if Canadian National attained certain financial performance benchmarks in a given year, while the remaining seventy-three percent were exercisable without regard to corporate financial performance or other constraints. Id. at ¶ 25.

In lieu of the Social Security taxes paid by non-rail employers and employees under the Federal Insurance Contributions Act ("FICA"), 26 U.S.C. §§ 3101 et seq. , railroad employers and employees pay taxes under the RRTA. Doc. 22 at ¶ 7. Unlike FICA, the RRTA imposes two tiers of taxes, with Tier 1 providing benefits and taxes in a manner almost identical to FICA, and Tier II functioning like a private pension plan, tying its benefits to any individual employee's "earnings and career service." 26 U.S.C. § 3201. Tier 1 taxes are statutorily linked to FICA:

In addition to other taxes, there is hereby imposed on the income of each [rail carrier] employee a tax equal to the applicable percentage of the compensation received during any calendar year by such employee for services rendered by such employee. For purposes of the preceding sentence, the term "applicable percentage" means the percentage equal to the sum of the rates of tax in effect under [FICA].

26 U.S.C. § 3201(a). The RRTA defines "compensation" as "any form of money remuneration paid to an individual for services rendered as an employee to one or more employers." 26 U.S.C. § 3231(e)(1). Much as RRTA tax rates are statutorily linked to FICA, Treasury Department regulations define RRTA compensation by reference to FICA, providing that under the RRTA, "[t]he term compensation has the same meaning as the term wages in section 3121(a) [FICA] ... except as specifically limited by the" RRTA. 26 C.F.R. § 31.3231(e)–1. FICA in turn defines "wages" as "all remuneration for employment, including the cash value of all remuneration (including benefits) paid in any medium other than cash," subject to several inapplicable exceptions. 26 U.S.C. § 3121(a).

The dispositive issue here is whether the non-qualified stock options that Plaintiffs awarded to their employees are a "form of money remuneration" and thus "compensation" under the RRTA. Doc. 22 at ¶ 2. In their initial tax payments for the years at issue, Plaintiffs treated each exercised option as income for federal income tax purposes and compensation for the purposes of the RRTA, in the amount by which the publicly traded share price of Canadian National on the exercise date exceeded the exercise price for each option exercised. Id. at ¶ 23(c). Plaintiffs now believe that was a mistake. Wisconsin Central seeks refunds for the 2007-2011 and 2013 tax years in the amount of $205,327.49, Doc. 1 at ¶ 1; Doc. 22 at ¶ 3; Grand Trunk Western seeks refunds for the 2006-2012 tax years in the amount of $515,589.58, Doc. 22 at ¶ 3; Doc. 1 (14 C 10244) at ¶ 1; and Illinois Central seeks refunds for the 2006-2013 tax years in the amount of $12,600,958.82, Doc. 22 at ¶ 3; Doc. 1 (14 C 10246) at ¶ 1.

Similar suits have been filed in recent years. See BNSF Ry. Co. v. United States , 775 F.3d 743 (5th Cir. 2015) ; Union Pac. R.R. Co. v. United States , No. 8:14-cv-00237, slip op. (D. Neb. Jul. 1, 2016) (reproduced at Doc. 35-1); CSX Corp. v. United States , No. 3:15-cv-00427 (M.D. Fla. filed Apr. 3, 2015). In the two judgments issued thus far, the Fifth Circuit in BNSF Railway and the District of Nebraska in Union Pacific both upheld the Treasury Department's interpretation of "any form of money remuneration" to include non-qualified stock options. For the following reasons, this court reaches the same result.


The parties agree that this case is governed by the framework set forth in Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc. , 467 U.S. 837, 842–43, 104 S.Ct. 2778, 81 L.Ed.2d 694 (1984). Doc. 24 at 13; Doc. 26 at 10; Doc. 27 at 7; Doc. 28 at 4. Plaintiffs therefore have forfeited, if not waived, any argument that Skidmore , Auer , or some other deference regime applies. See G & S Holdings LLC v. Cont'l Cas. Co. , 697 F.3d 534, 538 (7th Cir.2012) ("We have repeatedly held that a party waives an argument by failing to make it before the district court."); Milligan v. Bd. of Trs. of S. Ill. Univ. , 686 F.3d 378, 386 (7th Cir.2012) ("[T]he forfeiture doctrine applies not only to a litigant's failure to raise a general argument ... but also to a litigant's failure to advance a specific point in support of a general argument."); Costello v. Grundon , 651 F.3d 614, 635 (7th Cir.2011) ("As the moving party, the [defendant] had the initial burden of identifying the basis for seeking summary judgment."); Salas v. Wis. Dep't of Corr. , 493 F.3d 913, 924 (7th Cir.2007) ("[A] party forfeits any argument it fails to raise in a brief opposing summary judgment.").

"At Chevron 's first step, [the court] determine[s]—using ordinary principles of statutory interpretation—whether Congress has directly spoken to the precise question at issue." Coyomani Cielo v. Holder , 758 F.3d 908, 912 (7th Cir.2014). If "Congress has directly spoken to the precise question at issue ... the court ... must give effect to the unambiguously expressed intent of Congress," Indiana v. EPA , 796 F.3d 803, 811 (7th Cir.2015) (quoting Chevron , 467 U.S. at 842–43, 104 S.Ct. 2778 ) (ellipses original) (internal quotation marks omitted), and end the inquiry there, see Coyomani Cielo , 758 F.3d at 912. "If, however, ‘the statute is silent or ambiguous with respect to the specific issue,’ " Chevron 's second step, at which "a reviewing court must defer to the agency's interpretation if it is reasonable," comes into play. Indiana v. EPA , 796 F.3d at 811 (quoting Chevron , 467 U.S. at 843–44, 104 S.Ct. 2778 ). Significantly, "there is a difference—which may be important in some Chevron cases—between clear meaning and the best of several interpretive choices." Coyomani Cielo , 758 F.3d at 914. If Congress has not directly spoken to the issue, it "has left the administrative agency with discretion to resolve a statutory ambiguity," and so the court must defer to an agency's reasonable interpretation of the statute. Ibid. (internal quotation marks omitted); see also Indiana v. EPA , 796 F.3d at 811.I.ChevronStep One

"The cardinal canon of statutory interpretation is that" a court "look[s] first to the text of the statute." United States v. All Funds on Deposit with R.J. O'Brien & Assocs. , 783 F.3d 607, 622 (7th Cir.2015) (quoting Conn. Nat'l Bank v. Germa i n , 503 U.S. 249, 253, 112 S.Ct. 1146, 117 L.Ed.2d 391 (1992) ). "Statutory construction must begin with the language employed by Congress and the assumption that the ordinary meaning of that language accurately expresses the legislative purpose." Turley v. Gaetz , 625 F.3d 1005, 1008 (7th Cir.2010) (quoting Park 'N Fly, Inc. v....

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3 cases
  • Ill. Cent. R.R. Co. v. United States, 14-cv-10246
    • United States
    • U.S. District Court — Northern District of Illinois
    • March 6, 2019
    ... ... 3231(e). See opinion and judgment entered July 8, 2016 (Dkt 33 and 34 in the instant docket), reported as Wisconsin Central Ltd. v. United States, 194 F. Supp. 3d 728 (N.D. Ill. 2016). The United States Page 2 Court of Appeals for the Seventh Circuit affirmed this Court's ... ...
  • Wis. Cent. Ltd. v. United States, 14-cv-10243
    • United States
    • U.S. District Court — Northern District of Illinois
    • March 6, 2019
  • Grand Trunk W. R.R. Co. v. United States, 14-cv-10244
    • United States
    • U.S. District Court — Northern District of Illinois
    • March 6, 2019
    ... ... entered July 8, 2016 (Dkt 32 and 33 in the instant docket), reported as Wisconsin Central Ltd. v. United States, 194 F. Supp. 3d 728 (N.D. Ill. 2016). The United States Page 2 Court of Appeals ... Wisconsin Cent. Ltd. v. United States, No. 14-cv-10243 (N.D. Ill.); Ill. Cent. R.R. Co. v. United States, No ... ...

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