BNSF Railway v. Loos

Tax Law

Argument: November 6, 2018

Petitioners’ Briefs: BNSF Railway Company

Respondents’ Briefs: Michael Loos

 Court below: 8th Circuit Court of Appeals

Court below: 8th Circuit Court of Appeals

Will a railroad worker be required to pay taxes on compensation for injury time?

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 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 $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. 

BNSF v Loos

This case will turn on the Court's interpretation of the word "compensation." If the Court thinks "compensation" includes payment for lost work time (Loos's $30,000), Loos will have to help BNSF pay some of the taxes (his $4,000 share). But if the Court decides lost work-time is not compensation (which is what the lower courts ruled), then Loos will 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.

The RRTA and the RRA

The statute at issue is the Railroad Retirement Tax Act (RRTA), which defines "compensation" as "any form of money remuneration paid to an individual for services rendered."

However, BNSF argues from a different, but related statute: the Railroad Retirement Act (RRA). The RRA provides benefits for railroad employees. Some of those benefits are funded by RRTA taxes.

The RRA definition of "compensation" mirrors the RRTA, except that it specifically includes "remuneration paid for time lost as an employee." BNSF says the RRTA definition should mean the same thing as it does in the RRA.

But Loos has two counterarguments:  

First, he says that Congress's choice not to include "remuneration paid for time lost" in the RRTA was a deliberate choice: Congress wasn't just saving space in the United States Code, it was excluding — by omission of that phrase — time-lost pay.

Second, Loos argues that the employer and employee portions of the RRTA tax are treated differently under the RRTA. According to Loos, the employer part is an "excise" tax on "compensation," but the employee part is an "income" tax.  

Why does that distinction matter? Because the Internal Revenue Code excludes FELA judgments from taxation under its general definition of "gross income." Loos hopes to convince the Court that this general exclusion applies.

What do other courts say?

It depends on who you ask. BNSF claims there's a circuit split: some courts (in this case, the Eight Circuit, and also the Missouri Supreme Court) have held that payment for time lost is not compensation; other courts (the Sixth Circuit, and the Supreme Courts of Iowa and Nebraska) ruled that it is. According to BNSF, these conflicting holdings encourage injured workers (like Loos) to forum-shop (picking the courts where they think they'll win).  

Loos responds that this "circuit split" is illusory because the cases BNSF cites involve statutes that are different than the one at issue in this case. In Loos's case, he received an award for a physical injury under the Federal Employers Liability Act (FELA). Loos points out that the Sixth Circuit case involved a wrongful discharge claim under a different law (the Uniformed Services Employment and Reemployment Rights Act). Furthermore, Loos points out that the four federal trial courts that have considered FELA have agreed with the Eighth Circuit.

Loos also says that there is no state court split, dismissing the Iowa and Nebraska rulings because they had less "thorough" reasoning than the Missouri court, so they're thus "erroneous."

What does the IRS say?

Remember, this case is limited to a single issue, involving Loos and BNSF only: whether his workers' compensation payment will be reduced by the amount that BNSF paid in taxes.

The issue of whether BNSF actually must pay the taxes is a separate issue, involving the IRS and BNSF. Of course, the railroad is worried that the Court might rule against it in this case. Then the IRS would make it pay taxes, including on Loos's share — but Loos wouldn't have paid his share of those taxes.

In fact, BNSF has already paid the full $10,000 in taxes to the IRS — both its portion and Loos's portion. But that doesn't mean that the issue is settled. The Court could disagree and say that BNSF overpaid. 

One of the main points of dispute between Loos and BNSF is whether the IRS actually requires BNSF to pay taxes. BNSF says IRS regulations require it; Loos says they don't. So, in addition to the statutory dispute above, the Court probably will look at the IRS regulations. However, the Court's interpretation of the statute prevails here.

And the IRS regulations?

The applicable IRS regulation seems to make FELA satisfactions taxable. It states, the "term compensation is not confined to amounts paid for active services, but includes . . . pay for time lost." And the Solicitor General filed a brief supporting BNSF's position that FELA judgments are taxable under the RRTA.

But Loos thinks it's not so simple. He points out that the IRS regulation used to say, until 1979, that compensation included "payment . . . made to an employee with respect to a personal injury." In Loos's view, removing that language was an intentional policy decision to remove FELA judgments from taxability as "compensation."

This sounds familiar…

If you think you've seen the RRTA before, you're right. During OT 2017, in the case Wisconsin Central Ltd. v. United States, the Court interpreted the same law. In that case, it decided that employee stock options are NOT "compensation" under the RRTA.