BNSF Railway v. Loos (Decision March 4, 2019)

Tax Law

Argument: November 6, 2018

Decision: March 4, 2019

Petitioners’ Briefs: BNSF Railway Company

Respondents’ Briefs: Michael Loos

Court below: 8th Circuit Court of Appeals

Court below: 8th Circuit Court of Appeals

Railroad workers will have to pay taxes on compensation they receive if they’re injured at work.

Michael Loos was a brakeman and conductor for BNSF Railway Company. In 2010, he fell on a snow-covered drainage grate in a BNSF train yard and twisted his knee, causing him to miss work. He sued BNSF for negligence. He won a jury verdict of $100,000 for medical expenses and $30,000 for lost wages. This case concerns who pays taxes on the $30,000: just BNSF, or both BNSF and Loos?

BNSF Railway v Loos Decision

BNSF asked the trial court to reduce Loos's judgment by an amount that would cover payroll taxes. In a normal situation, if Loos had worked on the railroad for BNSF and earned $30,000, he would have been responsible for around $4,000 in taxes (employee portion of payroll taxes) and BNSF would have been responsible for $6,000 (employer portion). But since he wasn't technically working — instead, he received it as compensation for injury — Loos says he shouldn't be responsible for the taxes.

In this case, the Court was asked to evaluate the word "compensation" in the Railroad Retirement Tax Act. BNSF argued "compensation" includes payment for lost work time (Loos's $30,000) so Loos should pay taxes on it (his $4,000 share). In opposition, Loos argued lost work-time is not compensation (which is what the lower courts ruled) so he should not have to  pay anything.

Digging into the law’s language

The lower courts (the Eight Circuit and the Eastern District of Missouri) thought that since applicable law defined "compensation" as money paid "for services rendered as an employee," then plainly the law required Loos to actually perform work for it to meet the definition. Loos didn't render any services to BNSF while he was hurt, so even though BNSF paid him, it wasn't for services rendered.

BNSF disagreed, arguing that since Loos would have performed service if he weren't injured. Since the compensation for lost time judgment is a substitute for on-duty work payment, it should be taxable as compensation.

Supreme Court Analysis

The Supreme Court hadn’t evaluated whether “compensation” under the RRTA could include a substitute for services rendered, but the Court has evaluated the same word in other tax laws. Justice Ginsburg, writing for the Court, noted that Congress passed both the Social Security Act and the Railroad Retirement Tax Act after the Great Depression to help workers plan for retirement. The SSA and the law determining tax payments under it (Federal Insurance Contribution Act) both have language mirroring the RRTA’s language about what payments to employees are taxable. The statutes employ the same phrasing that “wages” are taxed, and “wages” means “compensation . . . for services rendered.”

The Supreme Court has evaluated that same language in the SSA and in the FICA. In two cases, the Supreme Court said that substitute payments for “wages” caused by the employer’s wrong are included as wages. In Social Security Bd. v. Nierotko (1946), the National Labor Relations Board determined an employee had been wrongfully discharged. The employee got backpay, and the Supreme Court said that the backpay is considered “wages” for tax purposes, despite that the employee didn’t exactly render services for it. More recently, in United States v. Quality Stores (2014), the Court evaluated whether severance payments should be taxed under the definition of “wages” in FICA. Yes, it ruled. Again, if the payment is awarded to redress the “loss of wages” occasioned by the “employer’s wrong,” then the payment is considered as “compensation” under the tax law.

Supreme Court Decision

The Court decided to resolve this case by following Nierotko and Quality Stores. The language in the RRTA mirrors the language in the SSA and in FICA, which means that “compensation” should be interpreted the same way.

Because Loos’ payment was a monetary award to redress the “loss of wages” occasioned by the “employer’s wrong,” it counts as “compensation. Loos should pay tax on it.


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