Supreme Court Holds That Payments For Lost Wages Are Taxable “Compensation” Under The Railroad Retirement Tax Act

March 4, 2019

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Decided March 4, 2019

BNSF Railway Co. v. Loos, No. 17-1042

Today, the Supreme Court held 7-2 that payments for lost wages due to on-the-job injuries are a form of taxable “compensation” under the Railroad Retirement Tax Act (“RRTA”).

A railroad employee sued the railroad for work-related injuries and won a jury award that included $30,000 for lost wages.  The railroad moved to withhold from that amount $3,765 to cover the employee’s share of taxes under the RRTA, which taxes railroad employee “compensation” in order to fund retirement benefits for railroad employees.  26 U.S.C. § 3231(e)(1).  The district court denied the railroad’s motion and the Eighth Circuit affirmed, reasoning that an award for lost wages does not qualify as taxable “compensation” under the statute because “compensation” means “any form of money remuneration paid . . . for services rendered,” id., which does not include payments for services the employee would have rendered but for the injury.

Whether payments to railroad employees for lost wages due to on-the-job injuries are taxable “compensation” under the RRTA.

Court’s Holding:
Yes.  The term “compensation” under the RRTA includes not only payments for active service, but also payments for a period of absence from active service that stems from the “employer-employee relationship.”  Social Sec. Bd. v. Nierotko, 327 U.S. 358, 366 (1946).

“[W]e hold that ‘compensation’ for RRTA purposes includes an employer’s payments to an employee for active service and for periods of absence from active service. It is immaterial whether the employer chooses to make the payment or is legally required to do so.”

Justice Ginsburg, writing for the majority

What It Means:

  • The Court’s decision allows railroads to withhold RRTA taxes from payments they make to injured employees for lost wages.
  • As a result of this required withholding of taxes, injured railroad employees will not receive more money from payments for lost wages than they would have received from payments for actual services rendered.
  • The Court harmonized two statutes governing railroad employee retirement benefits:  (1) the Railroad Retirement Act, which determines benefits payable to railroad employees; and (2) the RRTA, which taxes employee “compensation” to pay for those benefits.  The Railroad Retirement Act defines “compensation” to include payment “for time lost as an employee,” 45 U.S.C. § 231(h)(1), and that same term in the RRTA now also encompass lost wages.
  • The decision is the second time in the last two Terms that the Court construed the RRTA.  In Wisconsin Central Ltd. v. United States, 585 U.S. __ (2018), Gibson Dunn successfully argued that stock options were not “compensation” under the RRTA because they are not “money remuneration” within the meaning of the statute.

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