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Supreme Court Reverses Eighth Circuit; Jury Award for Lost Wages Was Subject to Railroad Tax

(Parker Tax Publishing March 2019)

The Supreme Court reversed the Eighth Circuit and held that damages awarded to a railroad employee injured on the job that were designated as lost wages during the time the taxpayer was unable to work constituted taxable compensation under the Railroad Retirement Tax Act (RRTA). The Court rejected the Eighth Circuit's conclusion that the term "compensation" in Code Sec. 3231(e)(1) includes only pay for active service and found that, considering statutory construction and Supreme Court precedent, the term embraces pay received for periods of absence from active service. BNSF Railway Co. v. Loos, 2019 PTC 21 (S. Ct. 2019).


Michael Loos was injured while working at a BNSF Railway Company railyard. Loos sued BNSF under the Federal Employers' Liability Act (FELA) and won a jury verdict of over $126,000. Of that amount, the jury ascribed $30,000 to wages lost during the time Loos was unable to work.

BNSF asserted that the lost wages constituted "compensation" taxable under the Railroad Retirement Tax Act (RRTA) (Code Sec. 3201 to Code Sec. 3241). Therefore, BNSF said it was required to withhold a portion of the $30,000 attributable to lost wages to cover Loos's share of RRTA taxes, which came to approximately $3,700. In Loos v. BNSF Railway Co., 2017 PTC 355 (8th Cir. 2017), the Eighth Circuit affirmed a district court decision rejecting the requested offset, holding that an award of damages compensating an injured railworker for lost wages is not taxable under the RRTA. BNSF appealed to the Supreme Court, which granted certiorari.


Two statutes operate together to ensure that retired railroad workers receive their allotted pensions and benefits. The RRTA imposes a payroll tax on both railroads and their employees and categorizes the railroad's contribution as an excise tax in Code Sec. 3201. The Railroad Retirement Act (RRA) entitles railroad workers to various benefits and prescribes eligibility requirements. The RRA is administered by the Railroad Retirement Board.

Taxes under the RRTA, and benefits under the RRA, are measured by the employee's "compensation." In Code Sec. 3231(e)(1) and 45 U.S.C. Sec. 231(b)(1), compensation is defined as "any form of money remuneration paid to an individual for services rendered as an employee." Code Sec. 3231 excludes from compensation certain types of sick pay and disability pay. Reg. Sec. 31.3231(e)-1(a)(3) says that the term "compensation" includes amounts paid for an identifiable period during which the employee is absent from the active service of the employer. The IRS amended the regulation in 1994 specifically to provide that compensation includes "pay for time lost."

Congress created both the railroad retirement system and the social security system during the Great Depression primarily to ensure the financial security of workers when they reach old age. The railroad retirement system mirrors the social security system, which taxes employers and employees under the Federal Insurance Contributions Act (FICA) to fund retirement benefits. Social security taxes and benefit amounts are determined by the worker's "wages," the social security equivalent to "compensation." Wages are defined similarly as all remuneration for employment; for these purposes, employment means any service, of whatever nature, performed by an employee.

The term "wages" was interpreted in two Supreme Court cases, Social Security Bd. v. Nierotko, 327 U.S. 358 (1946) and U.S. v. Quality Stores, Inc., 2014 PTC 151 (2014). The Nierotko decision held that wages means remuneration for the entire employment relationship and includes pay received for periods of absence from active service because it compensates for the loss of wages which the employee suffered from the employer's wrong. In Quality Stores, the Court observed that Congress defined wages broadly, and held that severance payments qualified as wages taxable under FICA because the payments are made to employees only, in consideration for employment, and are calculated according to the function and seniority of the terminated employee.

Eighth Circuit's Holding

The Eighth Circuit construed the term "compensation" for RRTA purposes to mean only pay for services that an employee actually renders - in other words, pay for active service. The Eighth Circuit distinguished Nierotko and Quality Stores by reasoning that the FICA taxes payment for employment whereas RRTA taxes payment for services.

The Eighth Circuit's holding relied in part on the fact that Congress amended the RRTA to remove references to "pay for time lost" in 1975 and shifted the wage base for RRTA from monthly "compensation" to annual "compensation" in 1983. In the view of the Eighth Circuit, these deletions showed that compensation no longer includes pay for time lost. The Eighth Circuit also referred to the RRA which, like the RRTA as enacted in 1937, states that compensation includes remuneration for time lost as an employee and specifies that such pay is deemed earned in the month in which such time is lost. The Eighth Circuit pointed to the discrepancy between the RRA and the RRTA (which no longer contains this language) and concluded that Congress intended the RRA, but not the RRTA, to include pay for time lost.

Loos's Arguments

Loos took a different approach before the Supreme Court. He argued that remuneration for services rendered means "the package of benefits" an employer pays to retain an employee. Loos agreed that benefits like sick pay and vacation pay are taxable compensation but argued that FELA damages for lost wages are not because they are not included in the package of benefits. Such damages, according to Loos, compensate for an injury rather than for services rendered. Alternatively, Loos argued that even if voluntary settlements qualify as compensation, involuntary payments in the form of damages do not. Loos further contended that the RRTA's tax on employees did not apply to personal injury damages because the RRTA taxes the "income" of railroad employees, and under Code Sec. 104(a)(2), damages for personal injuries are excluded from gross income.

Supreme Court's Reversal

The Supreme Court held that compensation under the RRTA encompasses not just pay for active service but also pay for periods of absence from active service, provided that the remuneration in question stems from the employment relationship; FELA damages for lost wages therefore qualify as RRTA-taxable compensation. The Court reasoned that, given the textual similarity between the definitions of compensation for railroad retirement purposes and wages for social security purposes, its decisions in Nierotko and Quality Stores were relevant in interpreting the definition of compensation in Code Sec. 3231(e)(1).

The Court concluded that damages awarded under the FELA for lost wages fit comfortably within the definition of compensation. The Court reasoned that the FELA makes railroads liable in money damages to their employees for on the job injuries and that, if a railroad negligent fails to maintain a safe railyard and a worker is injured, the FELA requires the railroad to compensate the worker for, among other things, working time lost due to the employer's wrongdoing. Thus, FELA damages for lost wages are, in the Court's view, functionally equivalent to an award of backpay. Just as Nierotko held that back pay fell within the definition of wages in the social security context, the Court concluded that FELA damages for lost wages qualify as compensations and are therefore taxable under the RRTA.

The Court disagreed with the Eighth Circuit's conclusion that compensation means pay for active service. The Court found that FICA defines employment in language resembling the RRTA in all relevant respects. Construing compensation as less embracive than wages would, the Court reasoned, introduce an unwarranted disparity between terms Congress appeared to regard as equivalents.

The Court also found that the statutory history did not support the Eighth Circuit's conclusion. The Court pointed out that although Congress amended the RRTA in 1975 and 1983, the 1975 amendment left intact the language referring to remuneration for services rendered as an employee, and the 1983 amendments were technical amendments relating to the change from monthly to annual computation of compensation. The Court concluded that if Congress intended to exclude payments for time lost from compensation, it would not have done so in a manner so oblique. The Court also found the discrepancy between the RRA and the RRTA inconsequential; in its view, the RRTA's pinpointed exclusions from RRTA taxation for sick pay and disability pay signaled that nonexcluded pay for time lost remained RRTA-taxable compensation.

The Court rejected Loos's "package of benefits" argument, finding that under Nierotko, there was no dispositive difference between a payment voluntarily made and one required by law. The Court also found his Code Sec. 104(a)(2) argument unconvincing. In the Court's view, that argument conflated the distinct concepts of gross income, the prime component of the tax base on which income tax is collected, and compensation, the separately defined category of payments that are taxable under the RRTA. The Court noted that the RRTA contains no reference to gross income and found that Congress specified employee compensation, not gross income, as the tax base for the RRTA's income and excise taxes. The Court said it was telling that Congress did not adopt for RRTA purposes the exclusion of personal injury damages from taxation in Code Sec. 104(a)(2). Furthermore, if RRTA taxes were based on income or gross income rather than compensation, the RRTA tax base would sweep in nonrailroad income, including, for example, dividends, interest accruals, even lottery winnings. The Court said that shifting from compensation to income as the RRTA tax base would thus saddle railroad workers with more RRTA taxes.

Observation: In a dissenting opinion, two justices would have upheld the Eighth Circuit's decision on the basis that damages for negligence are not compensation for services rendered, reasoning in part that the FELA was simply a federalized substitute for a traditional state negligence tort claim of the sort that could be brought by anyone injured by the railroad, employee or not.

For a discussion of the RRTA taxes on compensation, see Parker Tax ¶213,160.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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