Amicus Curiae Brief — Wisconsin Central Ltd., et al., Petitioners v. United States

No. 17-530

In the Supreme Court of the United States

WISCONSIN CENTRAL, LTD., ET AL.

v.

UNITED STATES OF AMERICA

On Writ of Certiorari

to the United States Court of Appeals

for the Seventh Circuit

BRIEF OF CSX CORPORATION AND

UNION PACIFIC RAILROAD COMPANY

AS AMICI CURIAE

IN SUPPORT OF PETITIONERS

BRYAN KILLIAN

Counsel of Record

MARY B. HEVENER

ROBERT R. MARTINELLI

STEVEN P. JOHNSON

STEPHANIE SCHUSTER

MORGAN, LEWIS & BOCKIUS LLP

1111 Pennsylvania Avenue NW

Washington, DC 20004

(202) 739-3000

bryan.killian@morganlewis.com

i

TABLE OF CONTENTS

Page

Interest of the Amici Curiae ................................... 1

Summary of Argument ........................................... 2

Argument ................................................................ 2

I.

The government stretches the rule against

superfluities too far ........................................ 2

II.

Every exclusion functions when “money”

takes its original, ordinary meaning ............. 4

A.

Subsection (e)(1)(i) .................................. 6

B.

Subsection (e)(5) ..................................... 8

C.

Subsection (e)(9) ................................... 12

D.

Subsection (e)(12).................................. 13

Conclusion ............................................................. 16

ii

TABLE OF AUTHORITIES

Pages

CASES

Ali v. Fed. Bureau of Prisons,

552 U.S. 214 (2008) ................................................ 3

Allison Engine Co. v. United States ex rel.

Sanders,

553 U.S. 662 (2008) .............................................. 16

BNSF Railway Co. v. United States,

775 F.3d 743 (CA5 2015) .................................... 2, 4

Fort Stewart Schools v. FLRA,

495 U.S. 641 (1990) ................................................ 3

Lamie v. U.S. Trustee,

540 U.S. 526 (2004) ................................................ 3

Marx v. Gen. Revenue Corp.,

568 U.S. 371 (2013) .............................................. 16

Union Pacific R.R. Co. v. United States,

865 F.3d 1045 (CA8 2017) ...................................... 9

United States v. Atl. Research Corp.,

551 U.S. 128 (2007) .............................................. 16

Wis. Central v. United States,

856 F.3d 490 (CA7 2017) .................................... 2, 7

STATUTES, PUBLIC LAWS,

AND LEGISLATIVE MATERIALS

26 U.S.C. § 61............................................................... 3

iii

TABLE OF AUTHORITIES (continued)

Pages

26 U.S.C. § 61(a)(1) .................................................... 11

26 U.S.C. § 119(b)(3) .................................................. 13

26 U.S.C. § 132(g)(1) .................................................. 12

26 U.S.C. § 274(j)(3)(A)(ii)(I) ..................................... 10

26 U.S.C. § 423(c)....................................................... 14

26 U.S.C. § 422(c)(2) .................................................. 14

26 U.S.C. § 1532(e) (Supp. V 1939) ............................. 5

26 U.S.C. § 3231(e)(1) (1976) ....................................... 5

26 U.S.C. § 3231(e)(1)(i)........................................... 6, 7

26 U.S.C. § 3231(e)(5) .................................................. 8

26 U.S.C. § 3231(e)(9) ................................................ 12

26 U.S.C. § 3231(e)(12) ........................................ 13, 15

Act of Aug. 20, 1935,

Pub. L. No. 400, 49 Stat. 974 (1935) ...................... 4

Act of Oct. 7, 1978,

Pub. L. No. 95-427, 92 Stat. 996 (1978) ............... 13

Act to Amend the Railroad Retirement Act of 1974,

Pub. L. No. 94-547, 90 Stat. 2523 (1976) ............... 7

iv

TABLE OF AUTHORITIES (continued)

Pages

American Jobs Creation Act of 2004,

Pub. L. No. 108-357, 118 Stat. 1418 (2004) ..... 8, 14

Carriers Taxing Act of 1937,

Pub. L. No. 174, 50 Stat. 435 (1937) .................. 4, 5

Deficit Reduction Act of 1984,

Pub. L. No. 98-369, 98 Stat. 494

(1984) .................................................... 8, 10, 11, 12

Economic Recovery Tax Act of 1981,

Pub. L. 97-34, 95 Stat. 172 (1981) ......................... 9

Omnibus Budget Reconciliation Act of 1989,

Pub. L. No. 101-239, 103 Stat. 2106

(1989) ................................................................ 7, 13

Omnibus Budget Reconciliation Act of 1990,

Pub. L. No. 101-508, 104 Stat. 1388

(1990) .................................................................... 13

Staff of Joint Committee on Taxation,

GENERAL EXPLANATION OF THE REVENUE

PROVISIONS OF THE DEFICIT REDUCTION

ACT OF 1984 (Comm. Print 1984) ........................ 11

Tax Cuts and Jobs Act,

Pub. L. No. 115-97, 131 Stat. 2054 (2017) ........... 10

Tax Reform Act of 1986,

Pub. L. No. 99-514, 100 Stat. 2085 (1986) ... 8, 9, 10

v

TABLE OF AUTHORITIES (continued)

Pages

ADMINISTRATIVE MATERIALS

26 C.F.R. § 1.83-7....................................................... 14

26 C.F.R. § 1.274-3 ....................................................... 9

26 C.F.R. § 1.422-5(c) ................................................. 14

1 Fed. Reg. 1,576 (Oct. 13, 1936)................................ 5

28 Fed. Reg. 6,499 (June 25 1963) .............................. 9

53 Fed. Reg. 36,450 (Sept. 20, 1988) ......................... 10

54 Fed. Reg. 627 (Jan. 9 1989) .................................. 10

66 Fed. Reg. 57,023 (Nov. 14, 2001) .......................... 15

69 Fed. Reg. 46,401 (Aug. 3, 2004) ............................ 15

IRS Notice 92-12 (Mar. 26, 1992) .............................. 10

IRS Notice 2001-14 (Jan. 18, 2001)........................... 15

IRS Notice 2001-72 (Nov. 14, 2001) .......................... 15

IRS Notice 2001-73 (Nov. 14, 2001) .......................... 15

ARTICLES

Gazur, Assessing Internal Revenue Code

Section 132 After Twenty Years,

25 VA. TAX. REV. 977 (2006) ................................. 11

vi

TABLE OF AUTHORITIES (continued)

Pages

Hevener & Batter, Withholding on Stock

Options after Sun Microsystems,

24 TAX MGMT. COMPENSATION

PLANNING J. 3 (1996) ............................................ 15

Wiggins, Capital Gain v. Ordinary Income &

the FICA Tax Treatment of Emp. Stock

Purchase Plans, 53 TAX LAWYER 703 (2000) ....... 15

1

INTEREST OF THE AMICI CURIAE

CSX Corporation and Union Pacific Railroad

Company are two of America’s premier railroads.

Same as the railroads in this case, CSX and Union

Pacific are seeking refunds of RRTA taxes for themselves and their employees—CSX’s case is pending

in the Eleventh Circuit (No. 17-12961), and Union

Pacific’s case is pending in this Court (No. 17-1002).

Both amici have a clear interest in defending their

long-held view that corporate stock is not, and never

has been, a form of money.



No party or counsel for a party authored or contributed monetarily to the preparation or submission of any

portion of this brief. Counsel of record for all parties received notice of CSX’s and Union Pacific’s intention to file

this brief more than 10 days before it was due, and all

parties have consented to its filing.

2

SUMMARY OF ARGUMENT

In prior cases, the government has argued that

giving the word “money” in Section 3231(e)(1) its

original, ordinary meaning renders superfluous the

exclusions in (e)(1)(i), (e)(5), (e)(9), and (e)(12). All of

those exclusions were enacted decades after Congress defined “compensation” as a “form of money

remuneration,” and at the moment each was enacted, none was superfluous. They had meaning and

purpose consistent with interpreting “money” as a

“commonly accepted medium of exchange.” Any superfluities that appear today are the result of postenactment developments that do not change the original meaning of anything in Section 3231.

ARGUMENT

I.

THE

GOVERNMENT STRETCHES

AGAINST SUPERFLUITIES TOO FAR.

THE

RULE

To get around the ordinary meaning of “money”

in the RRTA, the government has argued that some

exclusions in Section 3231(e) would do nothing and

be unnecessary if “money” means “a commonly accepted medium of exchange.” To varying degrees,

lower courts have been persuaded by the government’s argument. See BNSF Railway Co. v. United

States, 775 F.3d 743, 754 (CA5 2015); Wis. Central v.

United States, 856 F.3d 490 (CA7 2017). But the argument is wrong, for it is based on a mischaracterization of the rule against superfluities.

The rule against superfluities is simply a preference for statutory interpretations that give all of a

statute’s text meaning or purpose. The rule is not a

command to eliminate technically unnecessary language from the law. Repetition, redundancy, and il-

3

lustrations are all technically unnecessary, but they

also are ordinary speaking and writing conventions.

See Fort Stewart Schools v. FLRA, 495 U.S. 641, 646

(1990). Congress has filled the U.S. Code generally,

and the Tax Code in particular, with technically unnecessary words and phrases that are nevertheless

useful and that nevertheless serve a purpose. See,

e.g., Ali v. Fed. Bureau of Prisons, 552 U.S. 214, 226

(2008). Section 61, the foundational definition of

“gross income,” defines it capaciously as “all income

from whatever source derived,” then lists a number

of examples of things that count as “gross income.”

26 U.S.C. § 61. The examples in Section 61 are not

problematic superfluities because they emphasize

and clarify congressional intent.

In recent cases, this Court has admonished parties that have elevated the rule against superfluities

into something more than just a rule of thumb. In

this case, the government is trying more of the same.

Looking at Section 3231(e) as it stands today, the

government contends that some exclusions appear to

do nothing if the word “money” takes its ordinary

meaning. And so, the government argues that “money” should not take its original, ordinary meaning (“a

commonly accepted medium of exchange”), but instead should be ignored as a meaningless modifier.

The government’s approach to the rule against

superfluities commits a double fault. The first fault

is this: the rule is not a license to ignore the plain

meaning of statutory words. See Lamie v. U.S. Trustee, 540 U.S. 526, 536 (2004). If giving “money” its

ordinary meaning meant that one or more exclusions

in Section 3231 had no practical effect, so be it.

But that’s not even an issue. For the second fault

in the government’s argument is in portraying some

4

of Section 3231(e)’s exclusions as having no practical

effect. Each does some work today, and each always

has. Because the goal of statutory interpretation is

to determine the original meaning of a statute, what

a provision did when enacted is more important than

what a provision does today for purposes of applying

the rule against superfluities.

Below, we prove our points. When each exclusion

the government attacks was enacted, it had meaning

and purpose consistent with the original meaning of

“money.” Any superfluities that appear today are the

byproducts of later legislation, which are not the

kind of superfluities that violate the rule.

II. EVERY EXCLUSION FUNCTIONS WHEN “MONEY”

TAKES ITS ORIGINAL, ORDINARY MEANING.

The Act now known as the RRTA became law in

1937. See Carriers Taxing Act of 1937, Pub. L.

No. 174, 50 Stat. 435 (1937). In the RRTA’s 1935

predecessor, Congress defined “compensation” as

any form of money remuneration for active

service, received by an employee from a carrier, including salaries and commissions, but

shall not include free transportation nor any

payment received on account of sickness, disability, or other form of personal relief.

Act of Aug. 20, 1935, Pub. L. No. 400, § 1, 49 Stat.

974 (1935). The government has pointed to the reference to “free transportation” as bolstering its position that “money” is a meaningless modifier, for why

else would Congress exclude an in-kind, non-money

benefit like “free transportation” from taxable “compensation” if “money” meant only “commonly accepted mediums of exchange”? See BNSF, 775 F.3d at

755. The answer is simple: free transportation was

5

not always provided in kind. It was sometimes provided in a commonly accepted medium of exchange—

reimbursements or “refunds issued to persons entitled to free transportation.” 1 Fed. Reg. 1,576, 1,577

(Oct. 13, 1936) (emphasis added). This exclusion,

therefore, was not superfluous before it was declared

unconstitutional.1

In contrast to the 1935 legislation, the RRTA had

only two exclusions when it was enacted in 1937—

one for tips and one for an employer’s payment of the

employee’s share of RRTA taxes:

The term “compensation” means any form of

money remuneration earned by an individual

for services rendered as an employee to one or

more employers * * *. Such term does not include tips, or the voluntary payment by an

employer, without deduction from the remuneration of the employee, of the tax imposed

on such employee by section 2 of this Act.

50 Stat. 435, 436; accord 26 U.S.C. § 1532(e) (Supp.

V 1939). For nearly forty years, those exclusions

were the only two. See, e.g., 26 U.S.C. § 1532(e)

(1940); 26 U.S.C. § 3231(e)(1) (1976) (with newly

added exclusions). And both, plainly, are consistent

1 That’s assuming the government is even right to call

it an “exclusion.” The reference to “free transportation”

immediately followed a reference to “salaries and commissions.” Read together, those references show that

Congress was providing illustrations of what was, and

was not, “money remuneration.” “Salaries and commissions” would have been “money remuneration,” and “free

transportation” would not have, even if Congress had left

them unmentioned.

6

with interpreting “money” as a commonly accepted

medium of exchange.

The government has insisted that several exclusions added decades later by later Congresses are

superfluous if the word “money” in Section 3231

takes its original, ordinary meaning. That is wrong.

Below, we show how all of those exclusions—

specifically, exclusions now codified in subsections

(e)(1)(i), (e)(5), (e)(9), and (e)(12)—had meaning and

purpose when they were enacted.

A. Subsection (e)(1)(i)

Current U.S. Code text

26 U.S.C. § 3231(e)(1)(i) excludes

the amount of any payment (including any

amount paid by an employer for insurance or

annuities, or into a fund, to provide for any

such payment) made to, or on behalf of, an employee or any of his dependents under a plan or

system established by an employer which

makes provision for his employees generally (or

for his employees generally and their dependents) or for a class or classes of his employees

(or for a class or classes of his employees and

their dependents), on account of sickness or accident disability or medical or hospitalization

expenses in connection with sickness or accident disability or death, except that this clause

does not apply to a payment for group-term life

insurance to the extent that such payment is

includible in the gross income of the employee.

Enactment history

When this exclusion was added in 1976, its text

ended after the term “accident disability.” See Act

7

to Amend the Railroad Retirement Act of 1974,

Pub. L. No. 94-547, 90 Stat. 2523 (1976).

Congress added the underlined language in

1989. See Omnibus Budget Reconciliation Act of

1989, Pub. L. No. 101-239, § 10205(a), 103 Stat.

2106 (1989).

The exclusion is not superfluous

The government’s superfluity arguments about

(e)(1)(i) mischaracterize (e)(1)(i) as, simply, an exclusion for health and life insurance—meaning, an

exclusion of an in-kind benefit. But that’s not what

the law says. Since 1976, (e)(1)(i) has excluded

“any payment * * * made to, or on behalf of, an

employee * * * on account of sickness or accident

disability or medical or hospitalization expenses.” 26 U.S.C. § 3231(e)(1)(i) (emphasis added).

And since 1989, (e)(1)(i) has excluded most “payments” for death benefits. Ibid. (emphasis added).

A “payment” is usually made using a medium of

exchange, like cash, checks, or direct deposit.

Thus, the (e)(1)(i) exclusion is not superfluous

when “money” takes its original, ordinary meaning.2

2 The Seventh Circuit suggested that subsections (e)(6),

(e)(10), and (e)(11) would be superfluous if “money” meant

“commonly accepted medium of exchange,” see Wis. Central, 856 F.3d at 492, but just like (e)(1)(i), all three of

those subsections exclude mediums of exchange because

they exclude “payment[s].”

8

B. Subsection (e)(5)

Current U.S. Code text

26 U.S.C. § 3231(e)(5) excludes

any benefit provided to or on behalf of an employee if at the time such benefit is provided it

is reasonable to believe that the employee will

be able to exclude such benefit from income

under section 74(c), 108(f)(4), 117, or 132.

Enactment history

When Congress added this exclusion in 1984, it

cross-referenced only Sections 117 and 132. See Deficit Reduction Act of 1984, Pub. L. No. 98-369,

§ 531(d)(2), 98 Stat. 494 (1984).

The cross-reference to Section 74(c) was added in

1986. See Tax Reform Act of 1986, Pub. L. No.

99-514, § 122(e), 100 Stat. 2085 (1986).

The cross-reference to Section 108(f)(4) was added in 2004. See American Jobs Creation Act of 2004,

Pub. L. No. 108-357, § 320(b), 118 Stat. 1418 (2004).

None of the cross-references is superfluous

In the past, the government has challenged only

two of (e)(5)’s four cross-references as superfluous—

the cross-references to Sections 74(c) and 132. (The

other two cross-references obviously encompass

money.) Below, we show that neither is superfluous

because both exclude mediums of exchange in some

way. Yet, even if they did not, there would be no superfluity because (e)(5) does not exclude only the exact same items that the cross-referenced sections exclude; it excludes anything that “it is reasonable to

believe” they exclude. It is, at the very least, reasonable to believe that Sections 74(c) and 132 exclude

9

benefits paid in a medium of exchange, in no small

part because those sections actually do exclude benefits paid in a medium of exchange.

Section 74(c): In 1986, (e)(5) was amended to

cross-reference Section 74(c), in the exact same legislation that amended Section 74(c) to cross-reference

the then-newly adopted Section 274(j). All were part

of a comprehensive congressional effort to unify tax

treatment of employee gifts and achievement

awards. See Tax Reform Act of 1986, Pub. L. No.

99-514, § 122, 100 Stat. 2085 (1986). Under regulations in effect before the 1986 enactment, anything

could count as an achievement award if its value was

below a threshold amount. See 28 Fed. Reg. 6,499,

6,505 (June 25 1963); see also Economic Recovery

Tax Act of 1981, Pub. L. 97-34, § 265, 95 Stat. 172

(1981) (raising the threshold to $400). Gift certificates, accordingly, could count as achievement

awards back then, and some gift certificates—those

akin to credit cards usable at a variety of retailers—

“fall within the medium-of-exchange definition of

money.” Union Pacific R.R. Co. v. United States,

865 F.3d 1045, 1051 (CA8 2017). As the rule against

superfluities requires, the Eighth Circuit correctly

analyzed (e)(5)’s cross-reference to Section 74(c)

within its original context.

The government has made an anachronous attack on the idea that (e)(5) excluded gift certificates

when the cross-reference to Section 74(c) was added

in 1986. Specifically, the government has argued

that gift certificates do not count as achievement

awards because a single IRS regulation, 26 C.F.R.

§ 1.274-3, requires that achievement awards be personal property. But that regulation didn’t exist in

1986. It was promulgated in 1988, and not even to

10

implement Section 274(j), but to implement Section

274(b)(3)—a 1981 law that the 1986 law repealed.

See Tax Reform Act of 1986, Pub. L. No. 99-514,

§ 122(c), 100 Stat. 2110.3 The 1988 regulation applied only retroactively to the 1982 through 1986 tax

years, see 53 Fed. Reg. 36,450, 36,450–51 (Sept. 20,

1988), so it clearly has nothing to say about the

meaning or purpose of (e)(5)’s cross-reference to Section 74(c).

The cross-reference to Section 74(c) cannot be

understood outside its original context. Consider

that the latest version of Section 274(j) explicitly

carves out gift certificates from the class of employee

achievement

awards.

See

26

U.S.C.

§ 274(j)(3)(A)(ii)(I). That carve-out has no effect on

the original meaning of (e)(5), though, because it is

the product of a law that was enacted a few months

ago and that applies only prospectively. See Tax

Cuts and Jobs Act, Pub. L. No. 115-97, § 13310, 131

Stat. 2054, 2132 (2017). The 2017 Congress that revised Section 274(j) clearly was not trying to change

the meaning of “money” in the RRTA.

Section 132: Section 132 was added to the Code

by the same law that added (e)(5). See Deficit Reduction Act of 1984, Pub. L. No. 98-369, § 531, 98 Stat.

494 (1984). Both were part of a congressional effort

to codify longstanding practices regarding fringe

benefits. And so, the same legislation that added

Section 132 to exclude specific fringe benefits also

provided, for the first time ever, that all other fringe

3 Regulations for Sections 74(c) and 274(j) were proposed in 1989, see 54 Fed. Reg. 627 (Jan. 9 1989), but

never promulgated, see IRS Notice 92-12 (Mar. 26, 1992).

11

benefits must be included in individuals’ gross income. See id. § 531(c); see also 26 U.S.C. § 61(a)(1).

Section 132 has grown over the years as Congress

has increased the number of excludable fringe benefits. Originally, Section 132 excluded just four items:

no-additional-cost services; qualified employee discounts; working condition fringes; and de minimis

fringes. See Deficit Reduction Act of 1984, Pub. L.

No. 98-369, § 531(a)(1), 98 Stat. 878. All can be paid

in forms of money (advances or reimbursements) just

like railroads have long provided free transportation

in the same forms of money. See Staff of Joint Committee on Taxation, GENERAL EXPLANATION OF THE

REVENUE PROVISIONS OF THE DEFICIT REDUCTION ACT

OF 1984, at 838 n.68, 856 (Comm. Print 1984); see

also Gazur, Assessing Internal Revenue Code Section

132 After Twenty Years, 25 VA. TAX. REV. 977, 982–

92 (2006) (examining fringe-benefit practices that

Congress codified in Section 132 and comparing

them with railroads’ free-transportation reimbursement practices). The Section 132 cross-reference in

(e)(5), then, has always excluded some fringe benefits paid in a medium of exchange.

The government has argued that (e)(5)’s crossreference to Section 132 is superfluous unless each

and every item excluded by Section 132 can be paid

in a form of money. That argument is wrong. By

cross-referencing Section 132, Congress used simple

and clear language to exclude from RRTA taxation

any fringe benefits that might be paid in money. The

cross-reference functions even if some fringe benefits

might not be paid in money.

The government misunderstands the purpose of

legislating by cross-reference within the Tax Code.

Cross-references ensure uniformity of result—an

12

item excluded in one part of the Code will also be excluded in other parts. Because the Code is held together with such cross-references, future Congresses

need only amend the ultimate, cross-referenced section to have a change ripple throughout the Code.

Cross-references in a tax exclusion save current and

future Congresses substantial time and attention.

The manifest purpose of (e)(5)’s cross-reference to

Section 132 is to ensure that certain fringe benefits

are not even arguably subject to RRTA taxation.

That’s why Congress wrote (e)(5) to exclude any

fringe benefits that “it is reasonable to believe” are

excluded under Section 132. That’s why Congress

inserted nearly verbatim exclusions in other taxing

statutes simultaneously. See Deficit Reduction Act of

1984, Pub. L. No. 98-369, § 531(d)(1)–(4), 98 Stat.

884 (adding four exclusions that cross-reference Section 132). After thirty years of amendments to Section 132, some of which have added money items and

some of which have not, (e)(5)’s cross-reference to

Section 132 still functions as intended. See, e.g.,

26 U.S.C. § 132(g)(1) (excluding qualified moving expense reimbursements—a form of money—as a

fringe benefit). The cross-reference to Section 132,

therefore, is not superfluous.

C. Subsection (e)(9)

Current U.S. Code text

26 U.S.C. § 3231(e)(9) excludes

the value of meals or lodging furnished by or on

behalf of the employer if at the time of such

furnishing it is reasonable to believe that the

employee will be able to exclude such items

from income under section 119.

13

Enactment history

This exclusion was added in 1989. See Omnibus

Budget Reconciliation Act of 1989, Pub. L. No.

101-239, § 10207(a), 103 Stat. 2106 (1989); see also

Omnibus Budget Reconciliation Act of 1990, Pub. L.

No. 101-508, § 11704(a)(19), 104 Stat. 1388 (1990)

(re-codifying this exclusion from (e)(10) to (e)(9)).

The exclusion is not superfluous

The meals-and-lodging exclusion cross-references

Section 119’s income-tax exclusions for employerprovided meals. One of those exclusions covers money: if an employee must pay an employer a fixed

amount for meals even if the employee declines

them, that fixed amount is excluded from the employee’s income—as if the employer had never even

paid the employee that money. See 26 U.S.C.

§ 119(b)(3). That exclusion existed before (e)(9) was

added to Section 3231. See Act of Oct. 7, 1978, Pub.

L. No. 95-427, § 4, 92 Stat. 996 (1978) (enacting Section 119(b)(3)).

D. Subsection (e)(12)

Current U.S. Code text

26 U.S.C. § 3231(e)(12) excludes

any remuneration on account of—

(A) a transfer of a share of stock to any individual pursuant to an exercise of an incentive stock option (as defined in section

422(b)) or under an employee stock purchase plan (as defined in section 423(b)), or

(B) any disposition by the individual of

such stock.

14

Enactment history

This exclusion was added in 2004, in the same

legislation that added nearly verbatim exclusions to

three other tax statutes. See American Jobs Creation

Act of 2004, Pub. L. No. 108-357, § 251(a), 118 Stat.

1418 (2004).

The exclusion is not superfluous

Understanding (e)(12) requires understanding

stock options. When an employee exercises an option,

the employee always spends money and always receives stock from the employer. Sometimes, an employee receives more than stock at exercise. An employee might receive cash instead of fractional shares,

and some qualified option programs pay employees

bonuses or “additional compensation, in cash or property,” at the time of exercise. 26 C.F.R. § 1.422-5(c).

Finally, an employee always receives cash when he or

she subsequently sells the stock that he or she had

purchased from the employer at a discount.

How an option transaction is taxed for income-tax

purposes depends on whether the option is qualified

or non-qualified. For non-qualified options, everything is usually taxed at exercise. See 26 C.F.R.

§ 1.83-7. Qualified options are treated more favorably: any cash an employee receives at exercise is

taxed at exercise, but the stock is taxed later, when

the employee disposes of it, usually by selling it for

cash. See 26 U.S.C. § 422(c)(2), 423(c); see also

26 C.F.R. § 1.422-5(c).

From their enactment, the two exclusions in the

two subparagraphs of (e)(12) have ensured that any

cash an employee receives in connection with a qualified stock option, whether at exercise or at sale, is

not subject to RRTA taxation. The Fifth and Seventh

15

Circuits missed that purpose because they endorsed

the government’s mischaracterization of (e)(12) as,

simply, “an exemption for qualified stock options.”

But by its plain language, (e)(12) excludes “any remuneration on account of (A) a transfer of stock to

any individual [through qualified options] * * * or

(B) any disposition * * * of such stock.” 26 U.S.C.

§ 3231(e)(12) (emphasis added).

Thus, when (e)(12) was enacted in 2004, both

parts of it had meaning and purpose consistent with

the original, ordinary meaning of “money.” The regulation making clear that cash bonuses may be paid

at exercise of certain qualified options was promulgated before (e)(12) was enacted. See 69 Fed. Reg.

46,401 (Aug. 3, 2004). What’s more, before (e)(12)

was enacted, the IRS had taken the position that

money an employee receives from a disqualifying

disposition of qualified stock (e.g., stock sold within a

year of exercise) was subject to employment taxes.

Basically, the IRS’s view was that, because those

proceeds count as “income” for income-tax purposes,

those proceeds also should count as “wages” (FICA)

and “compensation” (RRTA) for employment-tax

purposes. See IRS Notice 2001-14 (Jan. 18, 2001).

Employers disagreed and argued that employment

taxes should not be assessed because employees

alone control whether and when to sell their stock.

See Wiggins, Capital Gain v. Ordinary Income & the

FICA Tax Treatment of Emp. Stock Purchase Plans,

53 TAX LAWYER 703 (2000); Hevener & Batter, Withholding on Stock Options after Sun Microsystems,

24 TAX MGMT. COMPENSATION PLANNING J. 3 (1996).

The IRS proposed regulations that rejected the employers’ position. See 66 Fed. Reg. 57,023 (Nov. 14,

2001); see also IRS Notices 2001-72 & 2001-73 (Nov.

16

14, 2001). Amid the controversy that proposal generated, Congress rejected the IRS’s position. The 2004

amendments vindicated employers by adding nearly

verbatim exclusions to all relevant employment-tax

statutes, including (e)(12)(B) in the RRTA.

From the employers’ perspective, the new exclusions did not change the law because employers believed the IRS had been wrong to subject disqualifying dispositions to employment taxation. Still, the

(e)(12) amendment served a purpose. It shielded disqualifying dispositions from the IRS’s challenge and,

at a minimum, “perform[ed] a significant function

simply by clarifying” the law amid a debate about its

reach. United States v. Atl. Research Corp., 551 U.S.

128, 137 (2007); see Marx v. Gen. Revenue Corp.,

568 U.S. 371, 385–86 (2013); Allison Engine Co. v.

United States ex rel. Sanders, 553 U.S. 662, 670 n.1

(2008). For this reason, at a minimum, (e)(12) was

not superfluous upon enactment.

17

CONCLUSION

In the end, some of Section 3231(e)’s exclusions

may cover only a few forms of money. But that’s no

problem. They need to cover only one form of money

to defeat the government’s contention that they cover none. The judgment of the Seventh Circuit should

be reversed.

BRYAN KILLIAN

Counsel of Record

MARY B. HEVENER

ROBERT R. MARTINELLI

STEVEN P. JOHNSON

STEPHANIE SCHUSTER

MORGAN, LEWIS & BOCKIUS LLP

1111 Pennsylvania Avenue NW

Washington, DC 20004

(202) 739-3000

bryan.killian@morganlewis.com