What exactly is compensation? Generally, when we think of compensation in a business setting we think of a paycheck or direct deposit amount. The Supreme Court of the United States (SCOTUS) will soon hear a case that asks whether or not this definition should extend to include stock options.
The case involves the railway industry and the definition of the term “compensation.” In the applicable statute, the term is defined as “any form of money remuneration paid to an individual for services rendered as an employee.”
This definition is important because the railway industry must pay a tax on compensation that is unique to that industry. This tax, established under the Railroad Retirement Tax Act (RRTA), funds retirement programs for these workers. The industry argues the tax should apply only to actual cash earnings, not stock options. The government disagrees. This disagreement has progressed to a lawsuit with a multimillion dollar tax bill on the line.
The railway industry argues that the meaning of the word “money” is plain. Money is cash. Stock options do not fit this definition. Wisconsin Central, one of the railway companies involved in the suit, framed the case with an analogy. If mugged and the robber demanded all your money, you would assume the mugger referred to cash. You would not think the robber was requesting a transfer of ownership in stock options.
The United States counters that a Treasury Department regulation passed at the same time as the RRTA defines “compensation” to have the same meaning as “wages” except as “specifically limited by the Railroad Retirement Act.” As such, stock options qualify as compensation and should be subject to the tax.
The case serves as a reminder of the large tax implications that can come with conducting business. Business leaders can minimize tax obligations with tax planning strategies.