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    Wisconsin Central Ltd. v. United States

    From Ballotpedia - Reading time: 8 min

    Supreme Court of the United States
    Wisconsin Central Ltd. v. United States
    Term: 2017
    Important Dates
    Argument: April 16, 2018
    Decided: June 21, 2018
    Outcome
    Seventh Circuit reversed
    Vote
    5 - 4
    Majority
    Chief Justice John G. Roberts • Anthony Kennedy • Clarence Thomas • Samuel Alito • Neil Gorsuch
    Dissenting
    Ruth Bader Ginsburg • Stephen Breyer • Sonia Sotomayor • Elena Kagan


    Wisconsin Central Ltd. v. United States was a case argued during the October 2017 term of the U.S. Supreme Court. Argument in the case was held on April 16, 2018. The case came on a writ of certiorari to the United States Court of Appeals for the 7th Circuit.

    HIGHLIGHTS
  • The case: Subsidiaries of the Canadian National Railway Company (referred to collectively as "the railroad" by the courts) argued that stock options they gave to their employees were not money remunerations and should not be taxed under the Railroad Retirement Tax Act. The district court disagreed, and the railroad appealed. On appeal, the Seventh Circuit upheld the district court's decision, ruling that stock options were money remunerations within the meaning of the Tax Act.
  • The issue: "Whether stock that a railroad transfers to its employees is taxable under the Railroad Retirement Tax Act, 26 U.S.C. § 3231(e)(l)."[1]
  • The outcome: On a 5 - 4, the Supreme Court reversed the ruling of the Seventh Circuit.[2]


    • You can review the lower court's opinion here.[3]

    Background[edit]

    Legal question[edit]

    This was a case about the meaning of "money remunerations" under the Railroad Retirement Tax Act. The Seventh Circuit explained, "The Railroad Retirement Tax Act, passed in 1937, 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." In other words, the Railroad Retirement Tax Act, like the Social Security Act, imposes a tax on compensation. Both the employer and the employee must pay taxes on employees' compensation under the Tax Act.

    The Tax Act defines compensation as "any form of money remuneration paid to an individual for services rendered as an employee to one or more employers.” The issue in this case was whether stock options offered by the railroad to its employees counted as money remunerations. The tax was levied at the time the employees exercise the stock options, which occurs "when the market price exceeds the 'strike price' (the price at which the employee has a right to buy the stock) and thus obtain the stock at a favorable price."[3]

    Case background[edit]

    In 1996, subsidiaries of the Canadian National Railway Company (referred to collectively as "the railroad" by the courts) began offering stock options as part of compensation packages for its employees. In 2014, the railroad filed suit against the United States, arguing that stock options were not taxable under the Tax Act because they were not money remunerations. The railroad argued that only cash money was subject to the Tax Act. The district court disagreed, finding that stock options were money remunerations and thus subject to the Tax Act. The railroad then appealed.[3]

    Panel opinion[edit]

    On appeal, the United States Court of Appeals for the 7th Circuit affirmed the district court's ruling. Writing for the two-judge majority, Judge Richard Posner concluded:

    “ 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. Indeed the railway offers its employees a choice to have an agent exercise an employee’s stock option, sell the shares of stock obtained by that exercise of the option, reserve 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 thus experience the stock option as a cash deposit.[3][4] ”


    Posner acknowledged that the Tax Act may not have originally contemplated including stock within the definition of money remuneration, but he ruled that the definition was sufficiently broad to include stock options now:

    “ It’s true that the Railroad Retirement Tax Act, in which the term 'money remuneration' appears, dates back to 1935, when the nation was mired in the Great Depression of the 1930s which had driven down the value of corporate stock. Maybe stock then wasn’t a form of money remuneration, but there is no reason to think that the framers and ratifiers of the Act meant money remuneration to be limited to cash even if, as was eventually to happen, stock became its practical equivalent, just as today 100 dimes is the exact monetary equivalent of a $10 bill. A $10 bill is paper; so is a stock certificate that can be sold for $10. The dictionary definition of money may remain constant while the instruments that comprise it change over time: sheep may have once been a form of money; now stock is.[3][4] ”


    Judge Daniel Manion dissented from the court's opinion. Manion would have ruled that money remunerations were limited to wages and did not include stock options:

    “ Although [the court] admits that '[m]aybe stock … wasn’t a form of money remuneration” when the RRTA was enacted, the court posits that 'there is no reason to think that the framers and ratifiers of the Act meant money remuneration to be limited to cash' in the event of future economic changes. Maj. Op. at 4. Even if that were true, our job is to interpret the Act as it would have been understood by people at the time it was enacted, not to speculate about the intent of Depression‐era legislators. Because the plain language of the statute’s definition of 'compensation' does not cover stock or stock options, I respectfully dissent.[3][4] ”


    The railroad then appealed to the United States Supreme Court.

    Petitioner's challenge[edit]

    The petitioners challenged the holding of the United States Court of Appeals for the 7th Circuit. They argued that the Seventh Circuit erred in concluding that stock options are money remunerations under the Railroad Retirement Tax Act.[3]

    Certiorari granted[edit]

    On October 6, 2017, the petitioner initiated proceedings in the Supreme Court of the United States in filing a petition for a writ of certiorari to the United States Court of Appeals for the 7th Circuit. The U.S. Supreme Court granted the petitioner's request for certiorari on January 12, 2017. Argument in the case was held on April 16, 2018.[1]

    Question presented[edit]

    Question presented:

    "The Railroad Retirement Tax Act, 26 U.S.C. § 3231(e)(l), defines taxable compensation' as 'any form of money remuneration paid to an individual for services rendered as an employee.'

    Petitioners' employees obtained stock when they exercised stock options granted by petitioners. The Seventh Circuit - agreeing with the Fifth Circuit but in direct conflict with the Eighth Circuit - held that stock is 'money remuneration' and hence taxable 'compensation.'

    The question presented is: Whether stock that a railroad transfers to its employees is taxable under the Railroad Retirement Tax Act, 26 U.S.C. § 3231(e)(l)."[1]

    Audio[edit]

    • Audio of oral argument:[5]



    Transcript[edit]

    • Transcript of oral argument:[6]

    Outcome[edit]

    Decision[edit]

    On a 5 - 4, the Supreme Court reversed the ruling of the Seventh Circuit.[2]

    Majority opinion[edit]

    Justice Neil Gorsuch authored the opinion for the majority, joined by Chief Justice John Roberts, Anthony Kennedy, Clarence Thomas, and Samuel Alito. Gorsuch wrote that the plain language of the Railroad Retirement Tax Act did not include stock options as money remunerations:

    “ We start with the key statutory term: 'money remuneration.' As usual, our job is to interpret the words consistent with their ordinary meaning . . . at the time Congress enacted the statute. And when Congress adopted the Act in 1937, 'money' was ordinarily understood to mean currency 'issued by [a] recognized authority as a medium of exchange.' Pretty obviously, stock options do not fall within that definition. While stock can be bought or sold for money, few of us buy groceries or pay rent or value goods and services in terms of stock. When was the last time you heard a friend say his new car cost '2,450 shares of Microsoft'? Good luck, too, trying to convince the IRS to treat your stock options as a medium of exchange at tax time.[2][7][4] ”


    Reviewing the language of other statutes, Gorsuch wrote that the definitions Congress had provided in other places also supported the conclusion that money remunerations under the Railroad Retirement Tax Act did not include stock options. Gorsuch concluded, "The problem with the government’s and the dissent’s position today is not that stock and stock options weren’t common in 1937, but that they were not then—and are not now—recognized as mediums of exchange."[2]

    Dissent by Justice Breyer[edit]

    Justice Stephen Breyer dissented, joined by Justices Ruth Bader Ginsburg, Sonia Sotomayor, and Elena Kagan. Considering the question at hand, Breyer argued that "the language itself is ambiguous but other traditional tools of statutory interpretation" supported the conclusion that money remunerations included stock options. He wrote, "A paycheck is not money, but it is a means of remunerating employees monetarily. The same can be said of stock options." Breyer argued that the term money in the statute was intended to exclude benefits and remuneration that could not be easily valued, like free transportation for life, which he said was a benefit offered by railroad companies at the time the act was passed.[2]

    “ Here, in respect to stock options, the Act’s language has a degree of ambiguity. But the statute’s purpose, along with its amendments, argues in favor of including stock options. The Government has so interpreted the statute for decades, and Congress has never suggested it held a contrary view, despite making other statutory changes. In these circumstances, I believe the Government has the stronger argument. I would read the statutory phrase as including stock options. And, with respect, I dissent from the majority’s contrary view.[2][4] ”


    Text of the opinion[edit]

    See also[edit]

    Footnotes[edit]

    1. ↑ 1.0 1.1 1.2 Supreme Court of the United States, " Wisconsin Central Ltd. v. United States" Question Presented, January 12, 2018
    2. ↑ 2.0 2.1 2.2 2.3 2.4 2.5 United States Supreme Court, "'Wisconsin Central Ltd. v. United States Opinion," June 21, 2018
    3. ↑ 3.0 3.1 3.2 3.3 3.4 3.5 3.6 United States Court of Appeals for the 7th Circuit, " Wisconsin Central Ltd. v. United States" Opinion, May 8, 2017
    4. ↑ 4.0 4.1 4.2 4.3 4.4 Note: This text is quoted verbatim from the original source. Any inconsistencies are attributable to the original source.
    5. ↑ Supreme Court of the United States, Wisconsin Central Ltd. v. United States, argued April 16, 2018
    6. ↑ 17-530 2co3.pdf Supreme Court of the United States, Pereira v. Sessions, argued April 16, 2018
    7. ↑ Internal citations omitted. Quotations in original.
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