The Supreme Court, in a 5-4 decision, has reversed the Seventh Circuit Court of Appeals and held that employee stock options are not taxable compensation under the Railroad Retirement Tax Act because they are not “money remuneration.”

The Railroad Retirement Tax Act of 1937 was adopted during the Great Depression to prevent railroad pension funds from going bankrupt. The legislation federalized private railroad pension plans, and it remains in force today. Under the terms of the law, private railroads and their employees pay tax based on employees’ incomes. In return, the federal government provides employees a pension often more generous than employees in other industries get under the Social Security system.

The case, Wisconsin Central Ltd. v. United States, arises from a peculiar feature of the statute, according to Justice Neil Gorsuch, who wrote the majority opinion that was released last week. In-kind benefits such as food, lodging, tickets and the like were not included in the calculation of an employee’s pension upon retirement, and Congress likewise limited its levies to employee compensation, which it defined as “any form of money remuneration.”

The U.S. Supreme Court building on Capitol Hill in Washington, D.C.
The U.S. Supreme Court building on Capitol Hill in Washington, D.C. Al Drago/Bloomberg

The IRS argued that the stock options qualified as a form of “compensation,” subject to taxation, since they could easily be converted into money. The railroads and their employees argued that stock options are not “money remuneration,” and therefore not taxable. The court sided with the railroads and their employees.

Justice Gorsuch noted that when the Act was passed in 1937, “money” was understood to be “currency.” While stock can be bought and sold for money, it isn’t generally understood to be a medium of exchange, he observed. Moreover, the Federal Insurance Contributions Act, enacted as a companion statute by the same Congress, taxes “all remuneration,” including benefits, “paid in any medium other than cash.”

“The Congress that enacted both of these pension schemes knew well the difference between ‘money’ and ‘all’ forms of remuneration and its choice to use the narrower term in the context of railroad pensions alone requires respect, not disregard,” Gorsuch stated.

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