Service modifies AOD on teachers' severance pay.

• Author: O'Driscoll, David
• Position: Action on Decision

In an Action on Decision (AOD) published on Jan. 18, 2007, the Service modified its litigating position on cases involving early-retirement payments to tenured faculty members in the Eighth Circuit.

Background

In North Dakota State University, 255 F3d 599 (8th Cir. 2001), the Eighth Circuit held that early-retirement payments made to tenured faculty members were not wages subject to withholding. In an AOD published on Dec. 31, 2001, the Service did not acquiesce in the Eighth Circuit's decision. Nevertheless, it recognized the precedential effect on cases appealable to that circuit, and acknowledged that it would follow the decision within the Eighth Circuit in cases with the exact same facts. The IRS's nonacquiescence in the decision remains unchanged.

In North Dakota, the Eighth Circuit held that a payment made to a tenured faculty member under North Dakota State University's early-retirement program was made in exchange for the relinquishment of the tenured faculty member's contractual and Constitutionally protected tenure rights, rather than as remuneration for services. As support for its decision, it cited Rev. Rul. 58301, 1958-1 CB 23. However, for the reasons set forth in the earlier AOD, the Service disagrees that North Dakota was analogous to Rev. Rul. 58-301.

Rulings

In Rev. Rul. 58-301, a worker was employed under a written contract providing for five years of employment. During the second year of employment, the worker and firm agreed to cancel the remaining period of the contract. In consideration of the worker's relinquishment of contract rights, the firm paid the worker a lump sum. The IRS concluded that the lump-sum payment was not wages for FICA and Federal income tax withholding purposes.

However, it modified and superseded Rev. Rul. 58-301 in Rev. Rul. 2004-110, 2004-2 CB 960, which held that an amount paid to an employee as consideration for the...