Lead Opinion
Bеginning in 1996, the plaintiff-appellants, subsidiaries of the Canadian National Railway Company (to simplify we’ll refer to the subsidiaries as “the railway”), began including stock options in the compensation plans of a number of employees. In this suit against the government, the railway argues that income from the exercise of stock options that a railroad gives its employees is not a form of “money remuneration” to them and is therefore not taxable to the railway as compensation under the Railroad Retirement Tax Act, 26 U.S.C. § 3281(e)(1), which defines “compensation” as “any form of money remuneration paid to an individual for services rendered as an employee to one or more employers.” See also BNSF Railway Co. v. United States,
As explained in Standard Office Building Corp. v. United States,
The question presented by this case is whether the excise tax should be levied not only on employees’ wages but also on the value of stock options exercised by employees who, having received the options from their employer, exercise them 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. The Internal Rеvenue Service answers yes, see 26 C.F.R. § 31.3231(e)-l, and the district court agreed, precipitating this appeal.
The lawyer for the IRS told us at oral argument that anything that has a market value is a “form of money remuneration.” That goes too far; it would impose a tax liability on an employer who bought an employee a birthday cake, even though the employеe could do nothing with his cake except eat it or give it away. But if instead he exercises a stock option, he now owns stock, and stock has so well-defined a monetary value in our society that there is no significant economic difference between receiving a $1000 salary bonus and a share or shares of stock having a market value of $1000.
By compensating an employee with stock options rather than cash the employer encourages the employee to work harder for the company, because the better the company does the more valuable its stock
As the discussion in the preceding paragraphs implies, 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.
It’s true that the Railroad Retirement Tax Act, in which the term “money remuneration” appears, dates baсk 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. The Internal Revenue Code of 1939 is of limited help here; it treats “money” and “stock” as different concepts, but that’s not inconsistent with stock options’ falling within “any form of money remuneration.”
The equivalence of stock to cash is actually signaled in the statutory exception for qualified stock options, explicitly divorced from “money remuneration” by 26 U.S.C. § 3231(e)(12). That exception, by virtue of its narrowness, suрports an inference that non-qualified stock options, which are the options at issue in this case, are covered by the term “money remuneration” and are therefore taxable. There are moreover other statutory exceptions for other forms of non-cash employee benefits, and their existence reinforces the inference that nоn-qualified stock options are “money remuneration” and therefore taxable. See, e.g., § 3231(e)(1) (excluding payments for health insurance or health care and travel expenses); (e)(5) (excluding non-cash employee achievement awards); (e)(6) (excluding educational benefits); (e)(9) (excluding value of meals and lodging provided to employees); and (e)(10) & (11) (excluding contributions for medical and health savings plans).
The government’s position also makes good practical sense by avoiding the creation of a tax incentive that might distort the ways in which employers structure compensation packages for their managers. And finally we are not alone in equating non-qualified stock options to money remuneration in the Railroad Retirement Tax Act. See BNSF Railway Co. v. United States, supra,
Affirmed.
Dissenting Opinion
dissenting.
The railroad plaintiffs have sought a tax refund on the ground that stock options they provided to their employees aren’t taxable as “compensation” under the Rail
The court disagrees. Although it admits that “[mjaybe 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 492. 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 lеgislators. Because the plain language of the statute’s definition of “compensation” does not cover stock or stock options, I respectfully dissent.
“It is a ‘fundamental canon of statutory construction’ that, ‘unless otherwise defined, words will be interpreted as taking their ordinary, contemporary, common meaning.’ ” Sandifer v. U.S. Steel Corp., - U.S. -,
As the statute is written, it is clear that “money remuneration” does not include stock options. For one, as I alluded to above, “it is well еstablished that RRTA and FICA are parallel statutes.” BNSF Ry. Co. v. United States,
We must give effect to Congress’s distinction between “money remuneration” and “all remuneration.” “After all, it is axiomatic that such notable linguistic differences in two otherwise similar statutes are normally presumed to convey differences in meaning.” United States v. Smith,
The difference in the statutes reveals that “money,” when contrasted with “all,” is a word of limitation. Further, its original meaning would not have encompassed company stock or stock options. The contemрorary Webster’s Second Dictionary defined “money” principally as “[m]etal, as gold, silver, or copper, coined, or stamped, and issued by recognized authority as a medium of exchange.” Webster’s New International Dictionary of the English Language 1583 (2d ed. 1934). More generally, money was “[a]nything customarily used as a medium of exchange and measure of value, аs sheep, wampum, copper rings, quills of salt or of gold dust, shovel blades, etc.” Id. Its synonyms were “cash,” “currency,” and “legal tender.” Id. In other words, media of exchange issued by a recognized authority. Simply put (and as the court somewhat acknowledges), money remuneration meant remuneration in cash or cash equivalents.
Furthermore, the Internal Revenue Code of 1939, which included for the first time the definitions of “cоmpensation” and “wages” under the RRTA and FICA, consistently treated money and stocks separately. One example is Section 115, which governed distributions by corporations. It said that when a distribution is payable “either (A) in its stock or in rights to acquire its stock ... or (B) in money or any other property (including its stock or in rights to acquire its stock),” then the distribution shall be considered a taxаble dividend “regardless of the medium in which paid.” 1939 Code, § 115(f)(2). Section 115(h)(1) said that such a distribution would not be considered a “distribution of earnings or profits of any corporation” if “no gain to such distributee from the receipt of such stock or securities, property or money, was recognized by law.” See also Helvering v. Credit Alliance Corp.,
The court relies on later-enacted statutory exceptions—principally a 2004 exception for qualified stock options added to both the RRTA and FICA—to draw an inference that “money rеmuneration” is broader than its original meaning suggests. However, “absent a clearly established congressional intention, repeals by implication are not favored.” Branch v. Smith,
Neither exception to the presumption against implied repeal is applicable. First, there is no conflict between a general definition and an exception that might cover things the general definition doesn’t cover. In United States v. Quality Stores, Inc., — U.S. -,
To be sure, “the implication of a later enactment ... will often change the meaning that would otherwise be given to an earlier provision that is ambiguous.” An-tonin Scalia & Bryan A. Garner, Reading Law: The Interpretation of Legal Texts 330 (2012) (emphasis added). However, the definition of “compensation” in the RRTA is not ambiguous with respect to the question presented here. As I have demonstrated, the original meaning of “money remuneration” was limited to cash and cash equivalents and did not include stock or stock options. Because the definitional statute is unambiguous, the later-enacted exceptions cannot alter its meaning.
In sum, Congress has long treated railroads differently than other industries.
I respectfully dissent.
Notes
. The court concedes that "monеy” isn't everything with a monetary value. Maj. Op. at 491-92. The value of this concession is limited. There is a market for everything, even the birthday cake that the court points to as the quintessential non-money item. The only difference between the birthday cake (and personal property, for that matter) and a share of stock is that the latter's value is more easily discoverable (because it's listed on a public exchange). But what about stock in a closely-held corporation, the value of which is not so obvious to the public? The court's result requires drawing a distinction on this non-textual basis. Interpreting the statute as it was originally understood avoids this problem.
Moreover, although it’s true that the stock options are not taxed until thеy are exercised (meaning that the employee purchases the stock at the strike price), it seems-strange to call a stock option "money remuneration” when its value is so contingent on future performance. While a share of stock in a publicly traded company has a well-known value, a stock option’s value isn’t quite the same thing. If an еmployee receives an option to purchase one share of Canadian National stock at $50 per share, but the stock plunges to $40 per share the next day and remains there during the length of the option, the option would be worthless. Although it would never be taxed in that instance, it would also not be of much value to the employee, who would hаve preferred "money remuneration.”
. Furthermore, the RRTA was enacted during the Great Depression, when corporate stock would not have been understood to be as liquid as it is today. Employees in the 1930s would not have taken it kindly had they been asked to accept company stock options in lieu of money remuneration. That lends credence to the conclusion that stock and stock options were not money remuneration.
. I must point out that, although I would hold the non-qualified stock options non-taxable under the RRTA, the proceeds from the sale of stock are of course taxable under generally applicable laws when the employee makes a profit. From the railroads' perspective, of course, they would avoid paying the tax on their end of the transaction.