Wisconsin Central Ltd., Illinois Central R.R. Co., and Grand Trunk Western R.R. Co., Plaintiffs-Appellants,
United States of America, Defendant-Appellee.
March 30, 2017
from the United States District Court for the Northern
District of Illinois, Eastern Division. Nos. 14 C 10243,
10246, 10244 - Gary Feinerman, Judge.
Posner, Manion, and Hamilton, Circuit Judges.
Posner, Circuit Judge.
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 compensa- tion plans of a
number of employees. In this suit against the government, the
railway argues that income from the exer- cise 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 Rail- road
Retirement Tax Act, 26 U.S.C. § 3231(e)(1), which de-
fines "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, 775 F.3d 743 (5th Cir.
explained in Standard Office Building Corp. v. United
States, 819 F.2d 1371, 1373 (7th Cir. 1987), "the
Railroad Re- tirement Tax Act, passed in 1937, is to the
railroad industry what the Social Security Act is to other
industries: the impo- sition of an employment or payroll tax
on both the employer and the employee, with the proceeds used
to pay pensions and other benefits. … The Act requires
the railroad to pay an excise tax equal to a specified
percentage of its employees' wages, and also to withhold
a specified percentage of its employees' wages as their
share of the tax. The railroad re- tirement tax rates are
much higher than the social security tax rates."
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
Reve- nue Service answers yes, see 26 C.F.R. §
31.3231(e)-1, and the district court agreed, precipitating
lawyer for the IRS told us at oral argument that any- thing
that has a market value is a "form of money remunera-
tion." That goes too far; it would impose a tax
liability on an employer who bought an employee a birthday
cake, even though the employee could do nothing with his cake
except eat it or give it away. But if instead he exercises a
stock op- tion, 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.
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 is. The value of a company's stock is
a function of the company's profitability, whereas the
size of a cash bonus, once it is given, is unaffected by the
company's future business successes or failures.
Underscor- ing the point, we note that the railway's
stock-option plans are performance-based: they can be
exercised only if the company achieves specified goals.
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 remu-
neration" than cash. Indeed the railway offers its
employees a choice to have an agent exercise an
employee's stock op- tion, 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 de- posit.
true that the Railroad Retirement Tax Act, in which the term
"money remuneration" appears, dates back 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 practi- cal
equivalent, just as today 100 dimes is the exact monetary
equivalent of a $10 bill. A $10 bill is paper; so is a stock
cer- tificate 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 op- tions' falling within
"any form of money remuneration."
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, supports 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
non-qualified stock options are "money re-
muneration" and therefore taxable. See, e.g., §
3231(e)(1) (ex- cluding 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).
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, ...