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University of Chicago v. United States

August 21, 2007


The opinion of the court was delivered by: Senior U.S. District Judge George W. Lindberg


Plaintiff, The University of Chicago, filed a complaint against defendant, the United States of America, seeking a refund of amounts plaintiff claims were erroneously collected by defendant pursuant to the Federal Insurance Contributions Act. (FICA). The parties have filed cross-motions for summary judgment. See FRCP 56.

Summary judgment is appropriate when there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. FRCP 56(b). When the parties file cross-motions for summary judgment, each party's motion must be evaluated on its own merits. Liberty Mutual Insurance Co. v American Home Assurance Co., 348 F Supp 2d 940, 951 (ND Ill 2004). The court must view the evidence making all reasonable inferences in favor of the nonmoving party. Anderson v Liberty Lobby, Inc., 477 US 242, 255 (1986). The movant bears the initial burden of demonstrating that no material factual issue exists for trial. Celotex Corp. v Catrett, 477 US 317, 330 (1986). Once the movant has properly supported its motion, the non-moving party must offer specific facts demonstrating that a material dispute indeed exists. Id at 331. "The non-moving party . . . may not rest upon mere denials or allegations in the pleadings, 06 C 3452 but must set forth specific facts sufficient to raise a genuine issue for trial." Weicherding v Riegel, 160 F3d 1139, 1142 (7th Cir 1998). A mere scintilla of evidence is not sufficient to defeat a proper motion for summary judgment. Anderson, 477 US at 245.

The facts are not in dispute and may be stated very briefly. Plaintiff has for many years required eligible employees to participate in one of two retirement plans plain established by plaintiff, the Retirement Income Plan for Employees (ERIP) or the Contributory Retirement Plan (CRP). Under either plan, an employee is required to contribute a fixed portion of the employee's salary and plaintiff also makes contributions in order to fund the purchase of a non-transferable retirement annuity contract. The plans refer to the employees' contributions as being "withheld from their salaries," and employees are required to sign a "salary reduction agreement." During the years 2000 through 2003, plaintiff did not report, pay, or withhold pursuant to FICA taxes on amounts employees contributed to purchase their retirement annuity contracts. On May 13, 2005, defendant made assessments against plaintiff for unpaid employment taxes, failure to deposit penalties, and interest for all four quarters of the years 2000 through 2003. Notice of these assessments and demand for their payment were sent to plaintiff on that same date. On March 3, 2006, plaintiff sent the IRS Forms 843, Claims for Refund and Abatement, for each of the quarters 2000 through 2003. The dispute between the parties is essentially that defendant contends the employees' contributions to their retirement annuities are taxable, and that plaintiff owes taxes, interest, and penalties on the amounts of these employee retirement annuity contributions, and plaintiff contends those employee contributions are not taxable.

The statute which determines the taxability of the employee contributions at issue provides:

(a) For purposes of this chapter, the term "wages" means all remuneration for employment, including the cash value of all remuneration (including benefits) paid in any medium other than cash, except that such term shall not include--

(5) Any payment made to, or on behalf of, an employee or his beneficiary-- . . . .

(D) Under or to an annuity contract described in §403(b), other than a payment for the purchase of such contract which is made by reason of a salary reduction agreement (whether evidenced by a written agreement or otherwise).

26 USC § 3121(a)(5)(D). Thus, the general rule is that all remuneration for employment is included within the term wages, and so is taxable. See 26 USC § 3121(a). Plaintiff's position is that the contributions of its employees to their retirement plans fall under the exception to this general rule for annuity contracts described in § 403(b), which would take the employee contributions out of the definition of wages, and so would make them non-taxable. See 25 USC § 3121(a)(5)(D). Defendant's position is that the contributions of the employees to their pension plans fall within the exception to that exception as they were a payments for the purchase of annuity contracts made by reason of salary reduction agreements, which would bring those contributions under the definition of wages, and so those contributions would be taxable. See 25 USC § 3121(a)((5)(D).

On their face, both ERIP and CRP require each employee to accept a reduction in his or her salary, which is then used to fund the purchase of an annuity contract. In other words, both plans fall squarely within the terms of the exception to the exception described above, and so the employees' contributions under them would be taxable wages. Plaintiff, however, argues that the contributions were not made by reason of a salary reduction agreement.

In furtherance of this argument, plaintiff first argues that the statute is ambiguous because the phrase "made by reason of a salary reduction agreement" does not have a plain meaning. Plaintiff argues that every employee compensation package has two components: current compensation and future or deferred compensation. Anything that increases the deferred compensation component will have the effect of reducing the amount of current compensation the employer can pay. Since Congress could not have meant the language "made by reason of a salary reduction agreement" to include every agreement between an employer and an employee that has the effect of reducing current compensation, this language does not have a plain meaning. Plaintiff's solution is to interpret the statute to apply only to individually negotiated salary reduction agreements.

This court disagrees. The statute's language is not at all ambiguous, and covers just the set of facts that are present in this case. What plaintiff's argument most fundamentally misses is that it is a "salary reduction agreement" and not an agreement that has the effect of reducing salary that brings an employee's contributions within the definition of wages. In the present case, the employer required its employees to explicitly agree to a reduction in salary to provide part of the funding for their pension plans. Moreover, if it had been Congress's intent that the statute apply only to individually negotiated salary reduction agreements, it would have been a simple matter for Congress to have added the words "individually negotiated" to the statute.

Thus, 26 USC § 3121(a)(5)(D)'s phrase "salary reduction agreement" is not ambiguous, and includes the agreements in this case. See Public Transportation Retirement Board v Shalala, 153 F2d 1160, 1165 (10th Cir 1998) (interpreting a different provision of the Internal Revenue Code the court held that a salary reduction agreed to as a condition of employment constitutes a salary reduction agreement because "the employee has 'agreed' to the salary reduction by continuing employment.").

Both parties cite to the Internal Revenue Service's Revenue Ruling 65-208, which was in effect codified by Congress in the current version of ...

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