IRS has announced its nonacquiesence with the Court of Appeals for the Eighth Circuit’s holding that an employer was not liable for the railroad retirement tax with respect to collective bargaining-related lump-sum “ratification” payments that it made to union member-employees.
Background—Railroad Retirement Tax
The Railroad Retirement Tax Act of 1937 (RRTA), which federalized private railroad pension plans, provides that private railroads and their employees pay a tax based on employees’ income in exchange for a pension from the federal government. (Code Sec. 3201, Code Sec. 3221) The tax is imposed on employee “compensation,” which is defined in Code Sec. 3231(e)(1) as meaning “any form of money remuneration.”
Reg. § 31.3231(e)-1 interprets the term “compensation” under the RRTA as having “the same meaning as the term wages” for purposes of the Federal Insurance Contributions Act (FICA), “except as specifically limited” by the RRTA. Code Sec. 3121(a) defines wages for FICA purposes as “all remuneration for employment, including the cash value of all remuneration (including benefits) paid in any medium other than cash,” except as specifically excluded.
The IRS has ruled that that payments arising out of ratification of a collective bargaining agreement are subject to FICA. It said that that “employment” in the FICA context “encompasses the establishment, maintenance, furtherance, alteration, or cancellation of the employee-employer relationship.” (Rev Rul 2004-109, 2004-2 CB 258)
Background—Eighth Circuit Holding in Union Pacific Railroad Company Case
In Union Pacific Railroad Company v. U.S. (CA 8 2017) 120 AFTR 2d 2017-5320, the Eighth Circuit, reversing a district court holding, held that the employer, Union Pacific, was not liable for the railroad retirement tax with respect to “ratification payments” it made to employees when their unions ratified collective bargaining agreements. These payments were intended to encourage unions to ratify collective bargaining agreements; they typically required the recipient to be employed with Union Pacific on a certain date, and the amount paid out was tied to the number of hours that the employee had worked the previous year.
The Court stated that the payments were “money remuneration,” but were not made to employees for services rendered to the employer, even though made from an employer’s payroll, because the employer did not exercise control over whether the union ratified the collective bargaining agreement.
The Eighth Circuit premised this holding on its conclusion that RRTA taxes applied to a narrower scope of services than that to which FICA taxes applied. It stated that FICA, instead of taxing payment for “services,” taxed payment for “employment,” which is defined broadly as “any service, of whatever nature, performed… by an employee for the person employing him.” (Code Sec. 3121(b)) The Court said that transplanting the FICA’s definition into the RRTA disregards the RRTA’s focus on the authority and control that an employer exercises over an employee in determining whether the employee is performing a “service.”
Background—Supreme Court Loos Case
The Supreme Court, reversing the Eighth Circuit, held that, where a railroad employee was hurt while on the job due to employer negligence, compensation for his lost wages was subject to the railroad retirement tax. (BNSF Railway Co. v. Loos, (S Ct 2019) 123 AFTR 2d 2019-930)
The Supreme Court, in Loos, said the Eighth Circuit misconstrued “compensation” for RRTA purposes to mean only pay for “services that an employee actually renders,” in other words, pay for active service. Consequently, the Eighth Circuit held that “compensation” within the RRTA’s scope did not reach pay for periods of absence. But the Supreme Court said that FICA defined “employment” in language resembling the RRTA in all relevant respects. It compared Code Sec. 3121(b) (relating to FICA: “any service, of whatever nature, performed… by an employee”) with Code Sec. 3231(e)(1) (relating to RRTA: “services rendered as an employee”). The Supreme Court held that construing RRTA “compensation” as less embracive than “wages” covered by the FICA would introduce an unwarranted disparity between terms Congress appeared to regard as equivalents.
The Supreme Court, in Loos, held that the determination of whether payments are compensation or wages subject to the RRTA or the FICA, as applicable, is determined by whether the “payment[s] [are] remitted to the recipient because of” the employer-employee relationship.
IRS Nonacquiesces to Union Pacific
In an Action on Decision (AOD), IRS has announced its nonacquiescence with the Eighth Circuit’s holding in Union Pacific.
First, the IRS said that, per Loos, the same analysis in Rev Rul 2004-109 applies in the context of RRTA taxation.
Second, in light of the Supreme Court’s reasoning in Loos, the Eighth Circuit’s holding in Union Pacific that ratification payments are not subject to the RRTA has been superseded. Accordingly, the IRS will not follow the Eight Circuit’s holding in Union Pacific regarding the RRTA taxation of ratification payments in other cases.
To continue your research on the Railroad Retirement Tax Act, see United States Tax Reporter ¶ 32,014.
Subscribe to our Checkpoint Daily Newsstand email to get all the latest tax, accounting, and audit news delivered to your inbox each weekday. It’s free!