Beginning in 1996, Plaintiffs, subsidiaries of the Canadian National Railway Company (“the railway”) began including stock options in the compensation plans of a number of employees. Plaintiffs initially treated their exercised options as income for federal income tax purposes and compensation for the purposes of the Railroad Retirement Tax Act (“RRTA”). Later, they believed they were mistaken and filed suit for a refund from the federal government.
While certain facts are specific to the railroad industry, the Supreme Court’s decision in this case will affect any employee seeking relief of stock options from their employer. The RRTA is to the railroad industry what the Social Security Act is to other industries: the imposition of an employment or payroll tax on both the employer and the employee, with the proceeds used to pay pensions and other benefits. The RRTA requires the railroad to pay an excise tax equal to a specified percentage of its employees’ wages, and also to withhold a specified percentage of its employees’ wages as their share of the tax. In this case, the IRS had the view that excise tax should be levied not only on employees’ wages, but also on the value of the stock options exercised by the employee.
The U.S. District Court of the Northern District of Illinois found that the federal government’s interpretation of “any form of money remuneration” in the RRTA included non-qualified stock options. That court engaged in detailed statutory construction analysis to arrive at that conclusion, and granted the government’s motion for summary judgment. See Wis. Cent. Ltd. v. United States, 194 F.Supp.3d 728 (2016). The Seventh Circuit affirmed, finding that “the fact that cash and stock are not the same things doesn’t make a stock-option plan any less a ‘form of money remuneration’ than cash.” See Wis. Cent. Ltd. v. United States, 856 F.3d 490, 492 (2017). That court noted that the railway offered its employees a choice to have an agent exercise an employee’s stock option, sell the shares of stock obtained by the exercise of the option, reserve a part of the money received in the sale for taxes and administrative costs, and deposit the balance in the employee’s bank account. An employee who uses this method will therefore experience the stock option as a cash deposit, reasoned the court, which concluded that there is no reason to think that the framers and ratifiers of the Act meant money remuneration should be limited to cash.
Pointing to the evolution of monetary instruments, the Seventh Circuit quipped “sheep may have once been a form of money; now stock is.” Id. In the brief moving for certiorari, the railroad subsidiary shot back with: “No one pays for groceries with stock.”
The case is Wisconsin Central Ltd. et al. v. United States, case number 17-530, in the U.S. Supreme Court.
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Cotchett, Pitre & McCarthy LLP currently represents several employees who were terminated prior to receiving their duly earned stock options. If you are an employee who has been wronged in this or another way by their employer, contact us.