UP Court Case Victory

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    I recently ran across a judgement by the 8th Circuit Court of Appeals in favor of the Union Pacific in a case vs the US Government. The case (No. 16-3574) involved the treatment of income from stock compensation (e.g. Retention Shares, Retention Units, Performance Units, or from exercising stock options).

    From what I have been able to determine, the Court ruled that this income was NOT “earned income”.

    The UP has set up a website for employees to file for refunds stating:
    Railroad Retirement Tax Refunds

      We’re pleased to report that a Union Pacific court win entitles many current and former UP employees to refunds of Railroad Retirement and Medicare taxes on stock. Union Pacific filed refund claims, on behalf of itself and its employees, to receive a refund of these over-collected Railroad Retirement taxes for the years 1991 through 2017.

    Certain current and former employees who received stock compensation (e.g. Retention Shares, Retention Units, Performance Units, or from exercising stock options) during the years 1991 through 2017 are eligible. ==============================================================================
    The UP, having paid an equal share of the payroll taxes, stands to split the $75m benefit with its employees.

    My question

      : I do NOT work for the UP but I did receive income from exercising employee stock options from 2004-2007. I can 100% confirm that I had to pay the 1.45% Medicare Tax on this income. I did not pay any incremental SS tax on the option income as my salary at the time exceeded the SS cap.

      Do I have a case for calculating a refund on the Medicare taxes that I paid on this income (along with a reasonable amount of interest) and slapping it on my 2018 tax return? After all, if it is not “earned income” for UP employees, it should not be “earned income” for anyone, right?
      Appreciate anyone’s thoughts.

    • This topic was modified 3 years, 1 month ago by Kaye Thomas.
    Kaye Thomas

    I moved this post from Other Tax Topics to this forum, as it pertains to equity compensation.

    The ruling you mention applies only to payments made under the Railroad Retirement Tax Act, which applies only to people who work for railroads. Your payments were under the Federal Insurance Contributions Act, which collects Social Security tax and Medicare tax from the rest of us. FICA applies to “all remuneration for employment, including the cash value of all remuneration (including benefits) paid in any medium other than cash.” It is undisputed that this definition includes compensation in stock and options, except the compensation element in incentive stock options and employee stock purchase plans. RRTA contains different statutory language, and applies to “any form of money remuneration.” Union Pacific was able to persuade the court that compensation in stock and options is not “money remuneration,” so RRTA does not apply to those forms of compensation.

    The upshot is that people who work for railroads and receive compensation in stock and options don’t have to pay tax under RRTA (at least in states covered by the Court of Appeals for the Eighth Circuit), which may sound like a good deal, though I’m guessing it also means they receive a smaller benefit when they retire. The decision does not in any way affect the vast majority of workers who pay tax under FICA rather than RRTA.


    Thank you Kaye.

    I re-read the court opinion a bit more closely this morning and (begrudgingly) came to the same conclusion.

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