Employee Stock Options Not Taxable Compensation for Railroad Workers.


The U.S. Supreme Court reverses a Seventh Circuit decision, finding that employee stock options are not taxable compensation under the Railroad Retirement Tax Act.

The plaintiff includes various private railroad companies and their employees. The defendant is the United States government.

Congress adopted the Railroad Retirement Tax Act of 1937 in response to the toll the Great Depression took on railroad pension funds as they reached the brink of insolvency. The legislation federalized private railroad pension plans and requires private railroads and their employees to pay a tax based on employees' incomes; in return, the federal government provides those employees with a pension often more generous than what the federal Social Security system provides to employees in other industries.

When the act was adopted, private railroads often compensated employees not just with money but also with food, lodging, railroad tickets and other similar items. The railroads did not typically count these in-kind benefits when calculating an employees pension upon retirement, and Congress did not consider them in its new statutory pension scheme. In addition, Congress did not attempt to tax these types of in-kind benefits. Instead, Congress limited its tax imposition on employee compensation and defined that term to take into account only "any form of money remuneration."

In order to enhance employee performance and align employee and corporate goals, some railroads decided to adopt employee stock option plans. The defendant argues that these stock options qualify as a form of money compensation subject to taxation under the act. The defendant believes that stock options can be easily converted into money and therefore qualify as money remuneration. The plaintiffs argue that stock options aren't money remuneration and that it was never the intent of Congress to tax in-kind benefits, including stock options.

The Court looks at the key statutory term under the act, money remuneration, to interpret it consistent with its ordinary meaning. The Court states that when Congress adopted the act, money was ordinarily understood to mean currency "issued by a recognized authority as a medium of exchange." The Court finds it obvious that stock options do not fall within that definition. While stock can be bought or sold for money...

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