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Individual Tax

Supreme Court: lost wages award to railroad employee was subject to RRTA

Thomson Reuters Tax & Accounting  

Thomson Reuters Tax & Accounting  

BNSF Railway Co. v. Loos (S Ct 3/4/2019)

The Supreme Court, in a 7-2 decision reversing the holding of the Eighth Circuit, has held that, where a jury awarded a railroad employee damages for the employee’s injuries caused by the railroad’s negligence, the portion of the award that was for lost wages was subject to the Railroad Retirement Tax.

Background. 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. 3201Code 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.

Facts. Michael Loos was working for the railroad, BNSF, when he fell into a hidden drainage grate in a train yard and injured his knee. He missed work for many months. Mr. Loos sought damages for BNSF’s negligence in maintaining the train yard. He brought his claim under the Federal Employers’ Liability Act (FELA). The jury awarded damages in three categories: $85,000 in pain and suffering, $11,212.78 in medical expenses, and $30,000 in lost wages—the final category representing the amount Mr. Loos was unable to earn because of the injury BNSF’s negligence caused.

The issue was whether the $30,000 was subject to the RRTA. The Eighth Circuit held that it was not subject, reasoning that the term “compensation” for RRTA purposes means only pay for active service.

Supreme Court: compensation for lost wages is subject to RRTA. The Supreme Court, reversing the Eighth Circuit, has held that compensation for lost wages is subject to the RRTA.

The Court noted that the statutory foundation of the railroad retirement system mirrors that of the Social Security system. The Federal Insurance Contributions Act (FICA) taxes employers and employees to fund benefits distributed pursuant to the Social Security Act (SSA). Tax and benefit amounts are determined by the worker’s “wages,” the Social Security equivalent to “compensation.” The FICA statute defines “wages” employing language resembling the RRTA definition of “compensation.” The term “wages” means “all remuneration” for “any service, of whatever nature, performed… by an employee.” (Code Sec. 3121(a)Code Sec. 3121(b))

The Court said that, given the textual similarity between the definitions of “compensation” and “wages,” the decisions on the meaning of “wages” in Social Security Bd. v. Nierotko, (S Ct 1946) 327 U. S. 358, and United States v. Quality Stores, Inc., (S Ct 2014) 112 AFTR 2d 2014-1326, are relevant for deciding cases involving the RRTA term “compensation.” In Nierotko, the Court held that “wages” embraced pay for active service as well as pay received for periods of absence from active service and concluded that backpay for time lost due to “the employer’s wrong” counted as “wages,” In Quality Stores, the Court held that severance payments qualified as “wages” taxable under FICA.

In line with these decisions, the Court here held that “compensation” under the RRTA encompasses not simply pay for active service but also pay for periods of absence from active service— provided that the remuneration in question stems from the “employer-employee relationship.” It said that damages awarded under the FELA for lost wages fit comfortably within this definition. If a railroad negligently fails to maintain a safe railyard and a worker is injured as a result, the FELA requires the railroad to compensate the injured worker for working time lost due to the employer’s wrongdoing. FELA damages for lost wages, like backpay, are “compensation” taxable under the RRTA.

The Supreme Court said that the Eighth Circuit’s holding cannot be reconciled with Nierotko and Quality Stores. In addition, it said, “the RRTA’s pinpointed exclusions for certain types of payments for time lost signal that nonexcludedpay for time lost remains RRTA-taxable ‘compensation.’”

Dissenting opinion. Justices Gorsuch and Thomas dissented. Their opinion stated: “When an employee suffers a physical injury due to his employer’s negligence and has to sue in court to recover damages, it seems more natural to me to describe the final judgment as compensation for his injury than for services (never) rendered. ”

References: For wages defined for FICA purposes, see FTC 2d/FIN ¶ H-4621United States Tax Reporter ¶ 31,114. For the Railroad Retirement Tax Act, see United States Tax Reporter ¶ 34,014.

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