Supreme Court declares stock options are not remuneration

Tax Hot Topics newsletterThe U.S. Supreme Court held in Wisconsin Central Ltd. v. United States, 585 U.S. ___ (2018) that employee stock options do not constitute “money remuneration” for purposes of the Railroad Retirement Tax Act (RRTA). The Supreme Court’s ruling reverses the U.S. District Court of Northern Illinois ruling, which was affirmed by the U.S. Court of Appeals for the Seventh Circuit.

Wisconsin Central Ltd., and other railway companies included in the case, granted nonqualified stock options to its employees as part of their compensation. The railway companies treated the exercise of employee stock options as wages subject to federal income tax withholding and as remuneration for purposes of the RRTA. In 2016, the railway companies collectively filed suit to seek refunds of the RRTA taxes paid on the exercise of the stock options. The railway companies argued that the stock options were not money remuneration under Section 3231(e) and therefore not subject to tax under the RRTA.

Similar to tax withholding under the Federal Insurance Contributions Act (FICA), the RRTA imposes taxes on employees and employers within the railroad industry based on employees’ compensation, with the tax proceeds used to fund the pensions and other benefits of railroad employees. Under Section 3121(e), compensation for RRTA purposes is defined as “any form of money remuneration paid to an individual for services rendered as an employee to one or more employers.”

Upon review, the Supreme Court first examined the definition of money, reiterating that the Court’s job is to interpret words consistent with their “ordinary meaning … at the time Congress enacted the statute.” According to the court, at the time Congress adopted the RRTA in 1937, the term “money” ordinarily meant currency “issued by [a] recognized authority as a medium of exchange.” The Supreme Court determined that stock options do not fall within the definition of money, going as far to state that few people “buy groceries or pay rent or value goods and services in terms of stock.”

Another deciding factor for the Supreme Court’s decision involved a comparison of the statutory language defining compensation under the RRTA and FICA, both of which were enacted by the same Congress in the 1930s. FICA taxes are imposed on “all remuneration for employment, including the cash value of all remuneration (including benefits) paid in any medium other than cash…” The Supreme Court found that the differences between the definitions for compensation under RRTA and FICA indicate that the RRTA statutory language was intentionally written to restrict the term “compensation” to money remuneration.

As a result, the Supreme Court determined that stock and stock options are not recognized as mediums of exchange and are therefore not “money remuneration” under the RRTA. As a result, stock option compensation is not taxable as compensation under the RRTA. The Supreme Court’s ruling does not apply to FICA taxes, which are imposed on stock option compensation of employees outside the railway industry.

Contact Jeffrey Martin
Washington National Tax Office
T +1 202 521 1526

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