The U.S. Supreme Court today issued a decision (five to four) holding that employee stock options are not taxable “compensation” under the Railroad Retirement Tax Act (RRTA) because they are not “money remuneration.”
The case is: Wisconsin Central Ltd. v. United States, No. 17-530 (S. Ct. June 21, 2018). Read the Supreme Court’s decision [PDF 134 KB] that includes a dissenting opinion.
The Supreme Court’s decision reverses the U.S. Court of Appeals for the Seventh Circuit.
This case concerns the definition of taxable “compensation” under the RRTA.
Some railroads granted stock options to employees to purchase shares of stock for a price equal to its value on the day the option was granted. The government asserted that the railroad employee’s gain upon exercise of these stock options satisfied the definition of taxable compensation under the RRTA. It was asserted that such stock options could be easily converted into money and thus qualified as “money remuneration.”
The railroads and their employees countered that the stock options were not money remuneration and thus were not taxable.
The Court majority agreed with the railroads. In reaching its decision, the Court looked to the enactment of the RRTA in 1937 and noted that stock options did not fall within the definition of money. The Court further noted that shortly after enactment of the RRTA, the predecessor of the IRS (the Bureau of Internal Revenue) issued a regulation explaining that the RRTA imposed tax on “all remuneration in money, or in something which may be used in lieu of money (scrip and merchandise orders, for example).”
The Supreme Court concluded based on these “textual and structural clues” that it was “clear enough that the term ‘money’ unambiguously excludes ‘stock.’” As a result, the stock acquired through the exercise of such stock options was not taxable compensation under the RRTA.
© 2018 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
The KPMG logo and name are trademarks of KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent member firms. KPMG International provides no audit or other client services. Such services are provided solely by member firms in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any member firm in any manner whatsoever. The information contained in herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's Federal Tax Legislative and Regulatory Services Group at: + 1 202 533 4366, 1801 K Street NW, Washington, DC 20006.