Two more railroad companies have failed in their efforts to obtain Railroad Retirement Tax Act (RRTA) tax refunds based on the application of RRTA’s definition of “compensation” as it relates to nonqualified stock option exercises by employees.  Just a week apart, the U.S. District Courts for Nebraska in Union Pac. R.R. Co. v. United States  and for the Northern District of Illinois in Wis. Central Ltd. v. United States, agreed with the government that the term “any form of money remuneration,” as compensation is defined by RRTA, is susceptible to a broad reading analogous to that of “wages” in the Federal Insurance Contributions Act (FICA).  Both courts, in detailed memorandum opinions, concluded that the income arising from the NQSO exercises had been properly subjected to Tier 1 RRTA taxes and, consequently, the refund claims were denied.  In so doing, both courts accepted the government’s position that the Treasury regulations defining RRTA compensation by reference to the definition of FICA wages in Section 3121(a) was a reasonable one.

In the first case on this issue, the U.S. Court of Appeals for the Fifth Circuit rejected BNSF Railway Company’s claims for refund of Tier 1 RRTA taxes that had been paid in conjunction with the exercise of nonqualified stock options.  In its refund claim, BNSF had argued that the term “any form of money remuneration” meant payment in cash or other medium of government authorized exchange and, consequently, NQSOs could not qualify as money.  Therefore, according to BNSF, income arising from the exercise of NQSOs did not constitute “compensation” subject to RRTA taxes.   In analyzing the definition of “compensation” under RRTA, the Fifth Circuit applied the two step framework set out in Chevron v. Natural Res. Def. Council, Inc. and concluded that Treasury was reasonable in interpreting RRTA coextensively with the FICA tax provisions, so that it was consistent with the broad reading of the term “wages” in FICA provisions.

Photo of Marianna G. Dyson Marianna G. Dyson

Marianna Dyson practices in the areas of payroll tax, fringe benefits, and information reporting, with a specific focus on perquisites provided to employees and directors, worker classification, tip reporting, cross-border compensation, backup withholding, information reporting, and penalty abatement.

Ms. Dyson advises large employers…

Marianna Dyson practices in the areas of payroll tax, fringe benefits, and information reporting, with a specific focus on perquisites provided to employees and directors, worker classification, tip reporting, cross-border compensation, backup withholding, information reporting, and penalty abatement.

Ms. Dyson advises large employers on the application of employment taxes, the special FICA tax timing rules for nonqualified deferred compensation, the voluntary correction of employment tax errors, and the abatement of late deposit and information reporting penalties for reasonable cause. On behalf of the restaurant industry, her practice provides extensive experience with tip reporting, service charges, tip agreements, and Section 45B tax credits.

She is a frequent speaker at Tax Executives Institute (TEI), the Southern Federal Tax Institute, and the National Restaurant Association.