BREAKING: Justices Say Railroad Stock Options Not Taxable In $13M Row

By Amy Lee Rosen

Law360 (June 21, 2018, 10:14 AM EDT) — The U.S. Supreme Court on Thursday decided that stock options given to employees of several subsidiaries of a Canadian railroad company are not taxable compensation under the Railroad Retirement Tax Act, reversing the Seventh Circuit in a $13.3 million lawsuit against the Internal Revenue Service.

In a 5-4 decision the court found the stock options did not qualify as taxable “money remuneration” under the RRTA. The court said it departed from the Seventh Circuit’s decision because the IRS issued a regulation stipulating that the RRTA taxes remuneration such as salaries, wages, commissions, fees and bonuses but did not mention stock.

“In light of these textual and structural clues and others, the Court thinks it’s clear enough that the term ‘money’ unambiguously excludes ‘stock,'” Justice Neil Gorsuch said in the court’s opinion.

Subsidiaries of Canadian National Railway Co. asked the Supreme Court to take on the case in October, saying the Seventh Circuit’s ruling departed from an Eighth Circuit decision that reached the opposite conclusion that such stock options were not taxable. The government similarly urged the Supreme Court to hear the case in December for the same reasons.

That Eighth Circuit case, USA v. Union Pacific Railroad Co., has a separate petition for certiorari request that is pending before the Supreme Court and is regarding $75 million paid in stock options to railroad employees.

Despite the separate petitions before the Supreme Court, the crux of both cases rely upon the meaning of “money remuneration” under the RRTA and whether stock options were envisioned as taxable pay under the meaning of the statute when it was originally enacted in the 1930s.

The Supreme Court decided to take the Seventh Circuit case in December and in April heard oral arguments from counsel in the case of Wisconsin Central Ltd. and the other Canadian National Railway Co. subsidiaries — Illinois Central Railroad Co., and Grand Trunk Western Railroad Co. — in April.

In its brief filed with the Supreme Court before oral arguments were held, Wisconsin Central said the Seventh Circuit’s decision departed from the Eighth Circuit’s view that while stock has cash value and can be exchanged for money, it is not a medium of exchange and therefore cannot be taxed under the RRTA.

The Association of American Railroads and other railway companies such as Norfolk Southern Corp. and Union Pacific wrote separate amicus briefs that were filed in February and urged the Supreme Court to find that stock options are not a form of compensation because the history of the RRTA showed the statute’s definition of taxable pay does not apply to stock.

In March the government said that stock options should be treated like money under the Federal Insurance Contributions Act, where taxable wages include stock options because the two statutes parallel each other.

Norfolk Southern Corp. is represented by M. Miller Baker, David R. Fuller and Sarah P. Hogarth of McDermott Will & Emery LLP.

Union Pacific and CSX are represented by Bryan Michael Killian, Mary B. Hevener, Robert R. Martinelli, Steven P. Johnson and Stephanie Schuster of Morgan Lewis & Bockius LLP.

The Association of American Railroads is represented by Daniel Saphire, Kathryn D. Kirmayer and Janet L. Bartelmay of the association.

Canadian National Railway and its subsidiaries are represented by William J. McKenna, Jonathan W. Garlough, David T. Ralston Jr. and Richard F. Riley Jr. of Foley & Lardner LLP and Thomas H. Dupree Jr. and Rajiv Mohan of Gibson Dunn & Crutcher LLP.

The IRS is represented by Solicitor General Noel J. Francisco, Deputy Assistant Attorney General David A. Hubbert and attorneys Francesca Ugolini and Ellen Page DelSole of the U.S. Department of Justice.

The case is Wisconsin Central Ltd. et al. v. United States of America, case number 17-530, in the U.S. Supreme Court.

–Editing by Neil Cohen.