The U.S. Supreme Court has determined that nonqualified employee stock options are not taxable compensation under the Railroad Retirement Tax Act (RRTA). The term “money remuneration” in the Act unambiguously excludes “stock.”
Several railroads filed a refund claim for overpaid Railroad Retirement taxes. The railroads claimed they overpaid their taxes because they included the value of employee stock options when calculating the tax.
The IRS denied the refund request. The IRS argued that stock options were taxable “money remuneration” under the RRTA because stock can be easily converted into money. The railroads replied that stock options are not money. Moreover, they argued that when Congress passed the RRTA, it sought to mimic existing industry pension practices. Generally, those practices ignored in-kind benefits like food, lodging, and railroad tickets.
Stock Options Not Money
When Congress adopted the RRTA in 1937, it understood “money” as “currency issued by a recognized authority as a medium of exchange.” Stock options do not fall within this definition. Further, while stock can be bought or sold for money, it is not usually considered a medium of exchange. Few people value goods and services using stock or buy groceries or pay rent with stock.
Also, adding the word remuneration did not alter the meaning of the word money. Thus, “any form of money remuneration” indicated that Congress wanted to tax money compensation. It did not indicate that Congress wanted to tax things, like stock, that are not money.
Moreover, the broader statutory context pointed to the same conclusion. For example, the 1939 Internal Revenue Code treated money and stock differently. However, the Federal Insurance Contribution Act taxes all remuneration, including benefits paid in a medium other than cash.
Further, a contemporaneous IRS rule explained that the RRTA taxed all money compensation. The rule lists examples like salaries, wages, commissions and bonuses. It also included things that could be used as money, like scrip. However, the rule did not suggest that stock was taxable compensation.
Thus, Congress knew the difference between money and other forms of compensation. The choice of Congress to use the narrower term for railroad pensions had to be respected.
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