Univ Pgh v. United States

Opinions of the United

2007 Decisions States Court of Appeals

for the Third Circuit

11-2-2007

Univ Pgh v. USA

Precedential or Non-Precedential: Precedential

Docket No. 06-1276

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PRECEDENTIAL

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

__________

No. 06-1276

__________

UNIVERSITY OF PITTSBURGH

v.

UNITED STATES OF AMERICA,

Appellant

__________

On Appeal from the United States District Court

for the Western District of Pennsylvania

(D.C. No. 04-cv-1616; 05-cv-00499)

District Judge: Honorable Donetta Ambrose

__________

Argued January 23, 2007

Before: SCIRICA, Chief Judge, FUENTES, and CHAGARES,

Circuit Judges.

(Filed: November 2, 2007)

__________

Ellen P. DelSole (Argued)

Kenneth L. Green

Eileen J. O’Connor

United States Department of Justice

1

Tax Division

Post Office Box 502

Washington, D.C. 20044

Attorneys for Appellant

Andrew K. Fletcher (Argued)

Pepper Hamilton

500 Grant Street, 50th Floor

Pittsburgh, Pennsylvania 15219

Kathryn M. Kenyon

Pietragallo, Bosick & Gordon

301 Grant Street

One Oxford Centre, 38th Floor

Pittsburgh, PA 15219

Attorneys for Appellee

____________

OPINION

____________

FUENTES, Circuit Judge.

The issue in this case is whether early retirement

payments made by the University of Pittsburgh (the University)

to its tenured faculty are taxable as “wages” under the Federal

Insurance Contribution Act (FICA), 26 U.S.C. § 3121-28. From

1996 to 2001, the University paid over $2 million in FICA taxes

on these payments. In 2001, however, it sought a refund from

the Internal Revenue Service (IRS), on the ground that the early

retirement payments were not “wages,” but instead were “buy

outs” not subject to FICA taxes. The IRS denied the refund, and

the University filed this action in the District Court for the

Western District of Pennsylvania. The District Court granted the

University’s motion for summary judgment, concluding that the

payments were not wages, and denied the government’s cross-

motion for summary judgment. This appeal followed.

2

Because we agree with the government that the retirement

payments are within the Act’s definition of wages we will vacate

the District Court’s grant of summary judgment, and remand for

entry of judgment in favor of the government.1

I. BACKGROUND

The following facts are not disputed. Between 1982 and

1999, the University offered five successive Early Retirement

Plans (the Plans) to tenured faculty members and administrators,

as well as non-tenured librarians whose contracts provided an

“expectation of continued employment.” Payments under all

five Plans were made monthly, and were based on an employee’s

salary at the time of retirement, as well as length of service to the

University. In four of the Plans, participation was limited to

covered employees with at least ten years of service, between the

ages of sixty-two and sixty-nine years old. In the fifth Plan,

participation was limited to employees with twelve years of

service, who were at least sixty years old, or whose sum of

service and years of age equaled at least eighty-five. To

participate, employees were required to execute an irrevocable

Contract for Participation. Employees who held tenure were

required to relinquish their tenure rights.

Pursuant to University policy, “tenure”

constitutes recognition by the University that a

person so identified is qualified by achievements

and contributions to knowledge as to be ranked

among the most worthy of the members of the

faculty engaged in scholarly endeavors: research,

teaching, professional training, or creative

intellectual activities of other kinds.

1

We exercise plenary review over a district court’s

summary judgment ruling. Mortellite v. Novartis Crop Prot., Inc.,

460 F.3d 483, 488 n.3 (3d Cir. 2006). “[T]he taxpayer bears the

ultimate burden of proving, by a preponderance of the evidence,

that [the IRS’s] assessment is erroneous.” Francisco v. United

States, 267 F.3d 303, 319 (3d Cir. 2001) (internal quotation marks

omitted).

3

(App. at 160-61, 181.) A non-tenured faculty member can serve

without tenure for a maximum of seven years (with some

exceptions not relevant here). After seven years, a faculty

member can be terminated for failing to meet the requirements

for tenure, or be granted tenure at the discretion of the

Chancellor and the Chief Executive of the University.

According to the University, tenure fosters an

environment of free inquiry because, once conferred, it affords

faculty “rights and immunities,” including immunity from

termination except for cause or financial exigency. (Univ. Br. at

3.) The University also may not terminate a tenured faculty

member without a hearing that comports with standards of

procedural due process under the Fourteenth Amendment. See

Bd. of Regents v. Roth, 408 U.S. 564, 576-77 (1972); McDaniels

v. Flick, 59 F.3d 446, 454 (3d Cir. 1995).

As noted above, the University paid over $2 million in

FICA taxes on payments under the Plans between 1996 and

2001. On November 19, 2001, the University filed claims with

the IRS for refunds totaling $2,196,942, the total amount of the

University’s FICA tax payments since 1996, including

employee-paid portions. Employees who participated in the

Plans consented to have the University seek a refund on their

behalf.

On October 30, 2002, the IRS denied the refund request,

and on October 21, 2004, the University filed this suit in the

District Court.2 The parties filed cross-motions for summary

2

The District Court had jurisdiction over refund claims

pursuant to 26 U.S.C. § 6532 and 28 U.S.C. § 1346(a)(1). The

University initially commenced two separate refund actions. In the

first action, the University sought a refund of FICA taxes paid

between January 1, 1996 and December 31, 2000. In a second

action, filed on April 15, 2005, the University sought a refund of

FICA taxes paid from January 1, 2001 to June 30, 2001. In an

Order entered May 13, 2005, the District Court consolidated the

two cases under this caption, and directed that the second case be

closed.

4

judgment, which the Court referred to Magistrate Judge Robert

Mitchell. The Magistrate Judge recommended granting the

University’s motion with respect to Plan payments to tenured

employees, but recommended granting the government’s cross-

motion with respect to Plan payments to non-tenured librarians.

On November 22, 2005, the District Court adopted the

Magistrate Judge’s Report and Recommendation, granting each

party’s motion for summary judgment in part, and denying each

in part. The Court entered judgment in favor of the University in

the amount of $2,088,358, plus statutory interest. Only the

government appealed.3

II. LEGAL FRAMEWORK

A. “Wages” Under FICA

The purpose of FICA taxes, as distinct from income

taxes, is to “fund a national system of social insurance that

supports important and extensive social security and medicare

health programs.” Temple Univ. v. United States, 769 F.2d 126,

130 (3d Cir. 1985). FICA taxes include a tax to fund old-age,

survivors, and disability insurance, and a tax to fund hospital

insurance. See 26 U.S.C. §§ 3101, 3111. In Temple we cited

the Senate’s comments explaining the underlying purpose of

FICA:

“The social security program aims to replace the

income of beneficiaries when that income is

reduced on account of retirement and disability.

Thus, the amount of ‘wages’ is the measure used

both to define income which should be replaced

and to compute FICA tax liability. Since the

security system has objectives which are

significantly different from the objective

underlying the income tax withholding rules, the

committee believes that amounts exempt from

3

The University does not appeal the determination that the

payments to non-tenured librarians were subject to FICA taxes.

5

income tax withholding should not be exempt from

FICA unless Congress provides an explicit FICA

tax exclusion.”

769 F.2d at 130 (quoting S. Rep. No. 23, 98th Cong., 1st Sess.

41, reprinted in 1983 U.S.C.C.A.N. 143, 183).

Under the Internal Revenue Code, employers and

employees are liable for payment of FICA taxes on all “wages”

that are received by an employee “with respect to employment.”

See 26 U.S.C. §§ 3101(a)-(b). Section 3121(a) defines “wages”

subject to FICA taxes as “all remuneration for employment,

including the cash value of all remuneration (including benefits)

paid in any medium other than cash.”4 Section 3121(b) defines

“employment” as “any service, of whatever nature, performed . .

. by an employee for the person employing him.”5

The Supreme Court has interpreted the term

“employment”—a component of the definition of

wages—broadly: “The very words any service . . . performed . .

. for his employer, with the purpose of the Social Security Act in

mind import breadth of coverage.” See Social Sec. Bd. v.

Nierotko, 327 U.S. 358, 365 (1946) (internal quotation marks

omitted) (emphasis added). Nierotko concluded, specifically,

that “service” in the phrase “any service performed” means not

only work actually performed, but also “the entire

employer-employee relationship for which compensation is paid

to the employee by the employer.” Id. at 365-66. Applying this

interpretation, Nierotko held that “back pay” awarded under the

National Labor Relations Act to a wrongfully discharged

employee had to be taxed as wages under the Social Security

Act.6 See id. at 364.

4

Section 3121(a) lists a number of exceptions to the

“wages” category, none of which applies here.

5

Section 3121(b) also lists a number of exceptions to this

definition, none of which applies here.

6

In FICA Congress retained the definition of wages

contained in the Social Security Act of 1935, essentially

6

Treasury regulations further provide that “[t]he name by

which . . . remuneration for employment is designated is

immaterial.” 26 C.F.R. § 31.3121(a)-1(c). Thus, for example,

“salaries, fees, bonuses, and commissions on sales or on

insurance premiums, are wages if paid as compensation for

employment.” Id. Likewise, “the basis upon which the

remuneration is paid is immaterial in determining whether the

remuneration constitutes wages.” Id. at § 31.3121(a)-1(d). For

example, “it may be paid on the basis of piecework, or a

percentage of profits; and it may be paid hourly, daily, weekly,

monthly, or annually.” Id. Unless remuneration for employment

is specifically excepted, it “constitutes wages even though at the

time paid the relationship of employer and employee no longer

exists between the person in whose employ the services were

performed and the individual who performed them.” Id. at §

31.3121(a)-1(i).

B. Relevant IRS Revenue Rulings

Both parties rely on IRS revenue rulings interpreting the

Code and regulations to support their characterization of the Plan

payments. We have explained that “although revenue rulings are

entitled to great deference, . . . courts may disregard them if they

conflict with the statute they purport to interpret or its legislative

history, or if they are otherwise unreasonable.” Reese Bros., Inc.

v. United States, 447 F.3d 229, 237-38 (3d Cir. 2006); see also

United States v. Mead Corp., 533 U.S. 218, 228 (2001) (“The

weight [accorded to an administrative] judgment in a particular

case will depend upon the thoroughness evident in its

consideration, the validity of its reasoning, its consistency with

earlier and later pronouncements, and all those factors which

give it power to persuade, if lacking power to control.”) (internal

quotation marks omitted). Neither party challenges the validity

of the applicable revenue rulings, but they dispute which among

them is most analogous to this case.

unchanged. See Rowan Cos., Inc. v. United States, 452 U.S. 247,

255, 256 n.11 (1981)

7

The University relies principally upon Revenue Ruling

58-301. In that Ruling an employer and employee entered a

five-year employment contract, which both parties agreed to

cancel in the second year. See Rev. Rul. 58-301, 1958-1 C.B.

23. In consideration of the employee’s relinquishment of his

contract rights—which had been negotiated at the outset of the

employment relationship—the employer paid the employee a

lump sum. Id. The IRS held that “a lump sum payment received

by an employee as consideration for the cancellation of his

employment contract . . . is not subject to the [FICA] tax.” Id.

The University argues that Plan payments were made in

consideration for its employees’ relinquishment of their

prospective contract rights and are therefore not wages, like the

payments in Ruling 58-301.

In response, the government points to three subsequent

Revenue Rulings that distinguish and limit the applicability of

Ruling 58-301. First, it cites Revenue Ruling 74-252, which

involved a three-year contract providing that the employer could

terminate the employee during the term of the contract if it paid

the employee an amount equal to six months’ salary. See Rev.

Rul. 74-252, 1974-1 C.B. 287. The employer terminated the

contract before it expired, and paid the required sum under the

contract in monthly payments. Id. The IRS deemed these

“dismissal payments” that were “made pursuant to the provisions

of the contract rather than as consideration for the

relinquishment of [property] interests” and, on this basis,

concluded that the payments were wages under FICA. Id. The

IRS distinguished Ruling 58-301 as involving “consideration for

the cancellation of the employment contract,” rather than

dismissal payments provided for as part of the employment

contract.

Second, the government cites Revenue Ruling 75-44, in

which a railroad employee received a lump sum payment as

consideration for relinquishing seniority rights that he earned

under his employment contract. See Rev. Rul. 75-44, 1975-1

C.B. 15. The employee acquired the rights, including the right

to security in his employment, based on longevity, but he

remained an “at will” employee. Id. The IRS determined that

the lump sum payment constituted taxable wages, and

8

distinguished Ruling 58-301:

In the instant case, the employee had acquired his

relinquished employment rights through his

previous performance of services whereas in Rev.

Rul. 58-301, the contractual rights relinquished

were acquired in the original negotiation of the

contract canceled. In Rev. Rul. 58-301, the

lumpsum payment was primarily in consideration

of the cancellation of the employee’s original

contract rights rather than primarily in

consideration of the past performance of services

through which the relinquished employment rights

were acquired.

Id. (emphasis added).

Finally, the government directs our attention to Revenue

Ruling 2004-110, 2004-50 C.B. 960, in which the IRS modified

and superceded Ruling 58-301. Ruling 2004-110 held that

payments to an employee for cancellation of the employment

contract and relinquishment of contract rights are wages subject

to FICA taxes. After reviewing these rulings, in addition to

several others, the IRS reasoned that:

[e]mployment encompasses the establishment,

maintenance, furtherance, alteration, or

cancellation of the employer-employee

relationship or any of the terms and conditions

thereof. If the employee provides clear, separate,

and adequate consideration for the employer’s

payment that is not dependent upon the

employer-employee relationship and its component

terms and conditions, the payment is not wages for

purposes of FICA. . . .

Under the facts presented in this ruling, the

employee receives the payment as consideration

for canceling the remaining period of his

employment contract and relinquishing his

contract rights. As such, the payment is part of the

9

compensation the employer pays as remuneration

for employment.

Id. Ruling 2004-110 limited Ruling 58-301 to its facts and to

payments made before January 12, 2005. Id.

C. The Circuit Split

This case presents an issue of first impression in our

Court. Two other Courts of Appeals have addressed these

precise questions, however, and have reached contrary

conclusions. The University relies on North Dakota State Univ.

v. United States, 255 F.3d 599 (8th Cir. 2001), which held that

early retirement payments to faculty who were required to

relinquish their tenure rights, were not wages under FICA. The

government relies on Appoloni v. United States, 450 F.3d 185

(6th Cir. 2006) which held that early retirement payments made

to public school teachers, who relinquished their statutory tenure

rights, were wages under FICA.

In North Dakota State, the Eighth Circuit determined that

a university’s early retirement payments were made “in

exchange for the relinquishment of [the faculty’s] contractual

and constitutionally-protected tenure rights rather than as

remuneration for services to [the University].” 255 F.3d at 607.

After examining the relevant revenue rulings, the court reasoned:

Under the terms of [North Dakota State’s] Early

Retirement Program, the tenured faculty received a

negotiated amount of money in exchange for . . .

their tenure rights. They did not receive what they

were entitled to under their contracts, which was

continued employment absent fiscal constraints or

adequate cause for termination. Rather, they gave

up those rights, making this case more analogous

to Revenue Ruling 58-301 than to Revenue Ruling

74-252.

Id. at 607.

The District Court adopted this reasoning, holding that

10

“payments made by the University . . . under the Retirement

Plans are not subject to FICA taxes . . . because, as in [North

Dakota State], the payments are analogous to Rev. Rul. 58-301,

in that they were made in exchange for the relinquishment of

contractual and constitutionally-protected tenure rights rather

than as remuneration for services to the University.” (App. at

11-12.)

Subsequent to the District Court’s decision, the Sixth

Circuit declined to follow North Dakota State. See Appoloni,

450 F.3d 185. Appoloni summarized its reasoning as follows:

[W]e find [it of] great significance that the tenure

rights at issue were earned through service to the

employer. This is for two reasons. First, we see

no reason to differentiate tenure rights from any

other right an employee earns through service to

any employer. . . . [C]ourts have found the

relinquishment of seniority rights, rights to bring

suit, and other types of rights in exchange for a

severance payment constitute FICA wages.

Secondly, because these rights were earned

through service rather than contracted for at the

time of employment, this suggests Rev. Rul. 75-44

is more on point than Rev. Rul. 58-301.

We also want to again emphasize the importance

of the school district’s principal purpose in

offering these severance payments. The school

district’s purpose here was not to “buy” tenure

rights. It was to induce those at the highest pay

scales to voluntarily retire early. Relinquishment

of tenure rights was incidental to the acceptance of

the severance payment. A school district could not

offer an early retirement payment and permit the

teacher to keep his/her tenure and remain

employed.

450 F.3d at 19596 (footnote and citations omitted).

11

III. ANALYSIS

The weight of authority holds that compensation paid to

an employee for services to her employer constitutes wages

under FICA regardless of whether it is prospective (for lost

earning potential), or retrospective (as a reward for past

service).7 For the following reasons, we conclude that the

relinquishment of tenure rights—although a condition precedent

to the payments—does not alter the Plan payments’ character as

compensation for services, and therefore as wages.

First, the eligibility requirements for payments under the

Plans are linked to past services at the University, not

relinquishment of tenure. As Appoloni explained, “[i]n

determining whether a payment constitutes wages, courts have

looked to eligibility requirements, specifically longevity, as an

7

See, e.g., Nierotko, 327 U.S. at 365-66 (remuneration for

employment includes “not only work actually done but the entire

employer-employee relationship for which compensation is paid to

the employee by the employer”); Appoloni, 450 F.3d at 190 (“The

holding in Nierotko clearly supports the conclusion that awards

representing a loss in wages, both back wages and future wages,

that otherwise would have been paid, reflect compensation paid to

the employee because of the employer-employee relationship,

regardless of whether the employee actually worked during the

time period in question.”); Assoc. Elec. Coop., Inc. v. United

States, 226 F.3d 1322, 1328 (Fed. Cir. 2000) (holding that

payments to employees under voluntary “early out” plan were

related in part to the employees’ prior service to Associated and,

for this and other reasons, were taxable as wages); Gerbec v.

United States, 164 F.3d 1015, 1026 (6th Cir. 1999) (determining

that compensation for lost “back wages” or “future wages” is

taxable under FICA); Rev. Rul. 75-44, 1975-1 C.B. 15 (holding

that payments for relinquishment of seniority rights acquired

through employee’s provision of past services are wages); cf. North

Dakota State, 255 F.3d at 606 (characterizing tenure as the start of

a new employment relationship, not payment in kind for past

services, and therefore not taxable as wages).

12

important factor.” 450 F.3d at 191.8 In this case, there is no

dispute that eligibility for the Plans, for both tenured and non-

tenured Plan participants, was based on the employee’s age and

years of service. These requirements link the Plan payments to

past services for the employer, not the specific rights being

relinquished, and weigh heavily in favor of treating the payments

as wages.9

8

See also Associated Electric, 226 F.3d at 1328 (noting that

while the method of computing severance payments, including the

length of service and pay rate, were not “dispositive,” the method

is “a relevant factor in determining whether the payments constitute

‘wages’”); Abrahamsen v. United States, 228 F.3d 1360, 1365

(Fed. Cir. 2000) (stating, where employee’s severance payments

were derived from a formula based on the employee’s salary and

years of service, that this “associate[d] the payments with the

employer-employee relationship” and strongly supported the

holding that payments were wages); Hemelt v. United States, 122

F.3d 204, 210 (4th Cir. 1997) (“[K]ey factors in determining the

amounts of each award were the length of each employee’s tenure

with Continental and the salary he received from Continental. . . .

[B]ecause the payments from Continental to taxpayers and other

class members arose out of their employment relationship, they fit

within the statutory and regulatory definition of wages . . . .”);

Sheet Metal Workers Local 141 v. United States, 64 F.3d 245, 250-

51 (6th Cir. 1995) (holding that distributions from a union

unemployment benefit fund were wages because eligibility was

contingent on employees’ length of service, and because

“eligibility requirements provide the most accurate test to

determine whether a payment is truly in consideration for

services”).

9

This is arguably different than the plans described in

North Dakota State, for which “past performance and current salary

were not the only factors considered in determining the amount of

early retirement payments; in fact there was no limit on what

factors could be considered.” 255 F.3d at 607 (emphasis added).

Here, even assuming the University could have relied on other

eligibility requirements, it chose to rely on ones that suggest the

Plan payments were wages.

13

Second, the Plans themselves make clear that the

payments were viewed as compensation for service to the

University. For example, the face of the 1998-2002 Plan reveals

that an important motivation for the Plans was to keep the

University’s compensation package competitive with peer

universities. See University Board of Trustees Resolution

Approving Implementation of 1998-1999 Retirement Plans,

App. at 159, 256 (resolving that 1998-2002 plan would be last

plan approved because the University “does have a favorable

retirement plan compared to peer universities”). Also, the 1983

Plan states that, in addition to making room for new faculty, the

University offered the Plan because it “deem[ed] it desirable and

appropriate to provide maximum flexibility and opportunities for

its faculty members to retire voluntarily prior to the mandatory

retirement age.” App. at 209. Subsequent plans state a similar

desire to reward valued faculty members.

To the extent the payments are a reward for service—as

the Plans themselves indicate—they qualify as wages:

“Payments for hard work and faithful service arise directly from

the employee-employer relationship and are payments which

recognize the value or character of the services performed for the

employer.” Associated Electric, 226 F.3d at 1327 (finding

manager’s testimony that early out payments were “the right

thing to do [because] [t]hese people had worked hard, and were

good people,” indicated payments were reward for past service

and therefore wages) (second alteration in original).

Third, even if the University made the payments in part

to secure relinquishment of tenure rights, their main purpose was

to provide for employees’ early retirement. In this way, they

were indistinguishable from severance payments, which are

generally taxed as wages. In this regard, we agree with the Sixth

Circuit’s statement in Appoloni that it

fail[ed] to see how this is different from other

severance packages just because a “tenure” right

was exchanged. In almost all severance packages

an employee gives up something, and we have a

hard time distinguishing this case from similar

14

cases where an employee, pursuant to a severance

package, gives up rights in exchange. Courts have

consistently held that severance payments for the

relinquishment of rights in the course of an

employment relationship are FICA wages. In fact,

we are at a loss to find a case, other than the

Eighth Circuit’s decision, to hold otherwise.

450 F.3d at 193. This reasoning is consistent with numerous

cases treating payment for the relinquishment of rights gained

over the course of employment—including severance packages

requiring waiver of all rights to sue—as wages.10

The University seeks to distinguish these accrued-

seniority and severance cases on the ground that the employees

had “at will” employment contracts, whereas here, “tenure is

obligatory for the University, optional with the faculty member.”

10

See, e.g., Abrahamsen, 228 F.3d at 1364-65 (“[T]he

payments at issue were at least partially motivated by IBM’s desire

to settle any claims [of] departing employees . . . . The employees,

however, have failed to demonstrate that . . . they constituted

settlement payments instead of severance payments made to

compensate for the employer-employee relationship.”); id. at 1362

(describing the breadth of employees’ release of claims “arising

from the Age Discrimination in Employment Act of 1967, as

amended, Title VII of the Civil Rights Acts of 1964, as amended,

and any other federal or state law dealing with discrimination in

employment on the basis of sex, race, national origin, religion,

disability, or age;” as well as “claims based on theories of contract

or tort, whether based on common law or otherwise”); Associated

Electric, 226 F.3d at 1328 (determining that payments made to

union employees “in exchange for valuable rights, i.e., the union’s

promise not to strike,” were FICA wages); CSX Corp. v. United

States, 52 Fed. Cl. 208, 221 (Fed. Cl. 2002) (declining to follow

North Dakota State and explaining that “[b]ecause . . . rights [to

vacation pay, sick pay, layoff pay, and seniority] . . . are integral to

the employment relationship—they are part and parcel of the job

protections and job benefits . . . [and therefore] they must be

considered wages”).

15

(Univ. Br. at 4; App. at 202.) This distinction misses the point.

Regardless of whether an employee voluntarily ended the

employment relationship, or whether the employee had a due

process right to maintain his employment, the rights relinquished

were gained through the employee’s past services to the

employer.

In this way, the tenure rights relinquished in this case are

most like the seniority rights relinquished in Revenue Ruling 75-

44. That Ruling drew an important distinction between

payments made for relinquishment of contract rights acquired at

the negotiation of a contract (as in Ruling 58-301), which are not

FICA wages, and payments for the relinquishment of rights

acquired over the duration of an employment contract (as in

Ruling 75-44), which are FICA wages. The Plan payments here

compensate employees for relinquishment of tenure rights

acquired through past service, and for this reason are most like

the payments in Ruling 75-44.11

Fourth, and relatedly, we reject the University’s

suggestion that because tenure is wholly discretionary and

affords new rights to the recipient, it is necessarily the start of a

new employment relationship, like the five-year contract in

Revenue Ruling 58-301. The University’s policy on

“Appointment and Tenure” shows that the award is contingent

on past performance and is more like a promotion than an

entirely new contract:

Academic tenure is a status accorded members of

the University faculty who have demonstrated high

ability and achievement in their dedication to

growth of human knowledge.

11

Because this case does not present facts that are

“substantially the same” as the facts in Ruling 58-301—most

notably, the rights at issue were earned over the course of a long

employment relationship, not at the outset of the relationship—we

are free to consider and afford some deference to the reasoning in

Ruling 2004-110. We need not do so, however, because Ruling

75-44 provides sufficient guidance.

16

Tenure is intended to assure the University that

there will be continuity in its experienced faculty

and in the functions for which they are

responsible.

Promotion to tenured rank constitutes recognition

by the University that a person so identified is

qualified by achievements and contributions to

knowledge as to be ranked among the most worthy

of the members of the faculty engaged in scholarly

endeavors.

(App. at 193-94) (emphasis added).12 The fact that tenure is

awarded on a very limited, discretionary basis does not change

the fact that it is awarded based on service to the University. In

this regard, we agree with Appoloni that courts

must not look simply at what is being relinquished

at the point a severance payment is offered, but

rather, how the right relinquished was earned.

Thus, we cannot understate the importance of the

fact that a teacher earns tenure by successfully

12

According to the University’s policy on tenure,

individuals from other universities may “[u]nder exceptional

circumstances” receive an initial appointment as an associate

professor or professor with tenure. See App. at 165 ¶ 4.6(h).

However, it appears that service at another university does not

satisfy the years of service requirement for participation in the

Plans. See App. at 154, ¶ 1-5 (defining years of service, a

requirement for Plan eligibility, as “each Contract Year with tenure

or in the tenure stream at the University of Pittsburgh as completed

by a Faculty Member”) (emphasis added). This limitation on

eligibility also suggests that the payments were based more on past

service to the University than relinquishment of tenure status. See

Associated Electric, 226 F.3d at 1328 (noting that employer’s

“desire to only compensate the employees for service to Associated

and not to the mine, which would have allowed compensation for

service to other employers,” supported characterization of early out

payments as wages).

17

completing a probationary period. In other words,

a teacher does not obtain tenure at the onset of

employment; it is a right that is earned like any

other job benefit. Admittedly, the grant of this

right is guaranteed and protected by statute. But

we fail to see how the fact that this right is

protected by statute takes away from the point that

it still must be earned through services to the

employer.

450 F.3d at 192-93 (citations omitted) (emphasis added).13

In sum, because tenure is a form of compensation for past

services to the University, payments offered as a substitute for

tenure are compensation and therefore taxable as wages. See 26

U.S.C. § 3121(a) (“[W]ages” includes “all remuneration for

employment, including the cash value of all remuneration

(including benefits) paid in any medium other than cash.”);

Appoloni, 450 F.3d at 195 (“Tenure rights were previously paid

in kind—job security—and now are being paid in cash.”); CSX,

52 Fed. Cl. at 221 (“Pursuant to [§ 3121(a)] . . . the value of the

benefits and protections that each employee held in his or her

position—rights to vacation pay, sick pay, layoff pay, and

seniority—constituted part of the employee’s total compensation

package and, hence, constituted wages. Therefore, when these

job-related benefits are relinquished in favor of a lump-sum

payment, the transaction simply amounts to a redemption, paid

in cash, of wage amounts previously paid in kind. . . . [W]hat

were wages at the start remain wages at the end.”).

13

In Appoloni, tenure rights were earned automatically,

whereas here, and in North Dakota State, they were awarded at the

University’s discretion. See 450 F.3d at 195 n.5 (quoting North

Dakota State, 255 F.3d at 601). Appoloni distinguished North

Dakota State on this basis, but we do not think this distinction

makes a difference, since it is clear in this case that, discretionary

or not, the employee’s rights were earned as a reward for their

service to the University.

18

III. CONCLUSION

The record in this case shows that payments under the

Plans were primarily in consideration for employees’ past

service to the University. Relinquishment of tenure rights, while

a condition precedent to the payments, was not the primary

consideration that employees offered. The payments therefore

qualify as wages subject to FICA taxation. Accordingly, we will

vacate the District Court’s entry of summary judgment in favor

the University, and remand to the District Court for entry of

summary judgment in favor of the government.

SCIRICA, Chief Judge, dissenting.

This case presents the question whether retirement payments the

University of Pittsburgh (“University”) made to former tenured faculty

members were “wages” subject to FICA tax. Although the matter is not free

from doubt, I would hold the payments were not wages because they were

given primarily in exchange for the faculty members’ relinquishment of

tenure, which is a property interest in continued employment absent cause or

financial exigency. See North Dakota State Univ. v. United States, 255 F.3d

599 (8th Cir. 2001).

The problem of defining “wages” in this case presents a contrast

between two possible concepts of faculty tenure at the University. Is tenure,

as the Government contends, analogous to seniority rights and other benefits

earned in the course of employment? Or, as the University argues, does

tenure mark the beginning of a new employment relationship distinct from

prior service? According to the first view, the payments at issue here were

remuneration for employment and were subject to FICA tax. According to the

second view, the payments were not remuneration for employment, because

they were given primarily in exchange for the relinquishment of property

rights the faculty received at the beginning of the tenured relationship. The

District Court, following North Dakota, agreed with the University. The

majority reverses and adopts the Government’s view. I would affirm and

follow North Dakota.

I.

I would hold the payments made in exchange for the relinquishment of

tenure by the University faculty members were not subject to taxation under

the Federal Insurance Contribution Act (FICA) because they were not

“wages” as that term is defined at 26 U.S.C. § 3121(a).

19

A.

The Internal Revenue Code requires employers and employees to pay

taxes under FICA on all “wages” an employee receives “with respect to

employment.” 26 U.S.C. § 3101(a)-(b). “Wages” means “all remuneration

for employment, including the cash value of all remuneration (including

benefits) paid in any medium other than cash.” Id. § 3121(a). “Employment”

is “any service, of whatever nature, performed . . . by an employee for the

person employing him.”14 Id. § 3121(b). “Service,” in turn, includes “not

only work actually done but the entire employer-employee relationship for

which compensation is paid to the employee by the employer.” Soc. Sec. Bd.

v. Nierotko, 327 U.S. 358, 365-66 (1946). It is undisputed that the payments

here were taxable income for ordinary income tax purposes. But not every

item of income is wages subject to FICA taxation. See Cent. Ill. Pub. Serv.

Co. v. United States, 435 U.S. 21, 25 (1978) (discussing the definition of

“wages” and noting “many items qualify as income and yet clearly are not

wages”). The question here is whether the payments were remuneration for

employment.

The Government contends the early retirement payments are wages

because they arise out of the employment relationship and are analogous to

severance payments and payments for relinquishment of accrued seniority

rights, which IRS rulings designate as wages. See Rev. Rul. 74-252, 1974-1

C.B. 287; Rev. Rul. 75-44, 1975-1 C.B. 15. The University argues the

payments are not wages because they were given in exchange for the

professors’ relinquishment of enforceable property rights in tenure, and are

analogous to “buy-outs” of unexpired contract rights – payments that, under

another IRS ruling, are not wages. See Rev. Rul. 58-301, 1958-1 C.B. 23.15

B.

14

The statute includes some exceptions, not relevant here,

to the definitions of “wages” and “employment.”

15

As the majority notes, in Revenue Ruling 2004-110, 2004-

2 C.B. 960, the IRS modified and superseded Revenue Ruling 58-

301. But Revenue Ruling 2004-110 by its terms does not apply to

payments made before January 12, 2005, in circumstances

substantially the same as in Revenue Ruling 58-301. Since the

payments at issue here occurred between 1996 and 2001, and the

circumstances here are substantially the same as in Revenue Ruling

58-301, I would hold Revenue Ruling 2004-110 is inapplicable to

the payments in this case.

20

The Fourteenth Amendment’s Due Process Clause protects interests in

property to which a person has a legitimate claim of entitlement. Bd. of

Regents of State Colls. v. Roth, 408 U.S. 564, 577 (1972). Property is not

limited to “actual ownership of real estate, chattels, or money,” id. at 572, and

it includes “interests that a person has already acquired in specific benefits.”

Id. at 576. We have recognized that tenured professors at public universities

hold a property interest in their tenure, so that procedural due process is

necessary when the university seeks to dismiss a tenured professor.

McDaniels v. Flick, 59 F.3d 446, 454 (3d Cir. 1995); San Filippo v.

Bongiovanni, 961 F.2d 1125, 1135 (3d Cir. 1992).

The payments at issue here were not wages because, as in North

Dakota, they were given in exchange for the relinquishment of property rights

in tenure that were established at the beginning of the tenure relationship

between the faculty members and the University.

II.

As some courts and commentators have observed,16 defining tenure can

be a vexing task. But the University’s Faculty Policies, which appear in the

record here, provide guidance. The concept of tenure that emerges from the

record more closely resembles a right established at the onset of a new

relationship than the types of benefits at-will employees earn over time. I

would hold payments for relinquishment of the latter type of rights are wages,

but those for the former type are not.

Two core aspects of the University’s tenure policy distinguish the

tenure right from certain job benefits earned over time that may be viewed as

remuneration for employment.

A.

First, as in North Dakota, the process by which tenure is awarded at the

University here distinguishes tenure from rights earned through service during

the employment relationship.

The University’s “tenure stream” is composed of faculty who are

eligible to receive tenure and those who already have tenure. The tenure

stream includes instructors, assistant professors, associate professors, and

professors. Only associate professors and professors can have tenure. A

faculty member without tenure can serve only for a limited time in the tenure

16

See, e.g., North Dakota State Univ. v. United States, 84 F.

Supp. 2d 1043, 1050 (D.N.D. 1999), aff’d, 255 F.3d 599 (8th Cir.

2001); Ralph S. Brown & Jordan E. Kurland, Academic Tenure

and Academic Freedom, 53 Law & Contemp. Probs. 325, 325

(1990).

21

stream – usually seven years. At the end of that period, either the faculty

member receives tenure or his or her service in the tenure stream is

terminated. But this “probationary” period is a prerequisite to tenure and is

not analogous to the time period during which employees accrue different

types of seniority rights. The University’s policies show tenure is more than a

recognition of satisfactory work. Rather, the decision to grant or deny tenure

depends on myriad qualitative factors and calls for an evaluation of each

candidate’s capacity for research, teaching, and contributing to knowledge.

Moreover, the University’s policy specifically imposes certain “Non-Merit

Considerations,” such as financial resources, personnel needs,17 and

curriculum demands.18 These latter criteria may depend not on the individual

professor’s role at the University, but on extrinsic forces. Accordingly, the

grant or denial of tenure cannot be viewed strictly as an evaluation of whether

a professor has performed adequately during employment, as is the case with

the accrual of seniority rights in other circumstances.

As the majority observes, the Sixth Circuit, in Appoloni v. United

States, 450 F.3d 185, 185 (6th Cir. 2006), cert. denied, 127 S. Ct. 1123

(2007), held early retirement payments to retired public school teachers given

in exchange for the teachers’ statutory tenure rights were FICA wages. But I

believe the tenure right at issue in Appoloni is distinguishable from the

university tenure here and in North Dakota.

In Appoloni, the public school teachers obtained tenure automatically

upon completion of a probationary period. Id. at 194. But here, just as in

North Dakota, tenure is “much more than a recognition for past services,” 255

F.3d at 605, and “is not automatic upon completing service for a specified

time period, which is a hallmark of ordinary seniority rights.” Id. In cases

like Appoloni, the teacher’s past satisfactory work during the probationary

period may be seen as consideration for the tenure award, but not so here

where the tenure decision is marked by such broad discretion and “Non-Merit

17

For example, the tenure policy states that in order to

“retain flexibility within the anticipated resources of the

University, the proportion of tenured to non-tenured faculty must

not rise to a level that would impair the University’s or school’s

capacity to respond to changing demands for its services.”

18

Relevant factors include “the current standards of the

relevant discipline or profession at large and the requirements of

the candidate’s department or school at the time of the

recommendation and for the then-foreseeable future.”

22

Considerations.” See id. at 606 (rejecting “the government’s underlying

premise that tenure accrues over time and is similar to seniority”).

B.

Second, the rights of tenure, along with its purposes, show that it marks

a new relationship between professor and university.

It is undisputed here that tenured faculty at the University can be

terminated only for “cause” or “financial exigency,” and only after a hearing.

According to the University, tenure, once awarded, is “obligatory for the

University, optional with the faculty member.” As we have recognized,

tenure at a public university is a right in “property” that entitles its holder to

procedural due process. San Filippo, 961 F.2d at 1135. The right to

indefinite employment absent cause or financial exigency may carry

substantial economic value even though it is not the type of property that

typically is traded. See Vail v. Bd. of Educ. of Paris Union Sch. Dist. No. 95,

706 F.2d 1435, 1451 (7th Cir. 1983) (Posner, J., dissenting) (“A contract that

gives a teacher the right to be employed till he retires is special, for unless he

is old or rich the present value of his tenure right is probably his biggest

asset.”), aff’d by an equally divided court, 466 U.S. 377 (1984) . By

relinquishing tenure, the faculty members gave up this value.

Tenure serves several purposes. It gives the University “continuity in

its experienced faculty and in the functions for which they are responsible.” It

helps the University foster “the independence of the mind and the freedom to

inquire.” It “constitutes recognition by the University that a [tenured faculty

member] is qualified by achievements and contributions to knowledge as to be

ranked among the most worthy of the members of the faculty engaged in

scholarly endeavors: research, teaching, professional training, or creative

intellectual activities of other kinds.” And importantly, as the University

notes, tenure serves an instrumental purpose in granting prospective rights

that protect faculty members’ academic freedom.

For all of these reasons, I agree with the North Dakota court’s

characterization of tenure as establishing a different relationship with the

University, not a mere continuation of service with added benefits. 255 F.3d

at 606. Tenure is the second of “two successive relationships with the

university,” id., and is “a significantly different status – effectively a new

job.” Id. (quoting Mayberry v. Dees, 663 F.2d 502, 516 (4th Cir. 1981)). As

in North Dakota, the property rights faculty members relinquished here were

not accrued through duration of satisfactory employment, but were instead

granted at the beginning of the separate tenured relationship with the

University, a beginning marked by the recognition of superior achievement

and “Non-Merit Considerations.” The payments are more analogous to buy-

outs of unexpired contract rights than to severance payments or payments for

23

the relinquishment of rights of at-will employees. Accordingly, I would hold

payments for the relinquishment of the property right in tenure at the

University were not remuneration for employment and were not subject to

FICA taxation.

III.

For the foregoing reasons, I would affirm the judgment of the District

Court.

24