Contributions to Retirement Plan Are "Wages" and Subject to Taxation Even if Employees Are Required to Participate
UNIVERSITY OF CHICAGO v. UNITED STATES (October 29, 2008)
The University of Chicago (“the University”) is an Illinois not-for-profit corporation and one of the world’s foremost universities. It maintains two separate retirement plans for employees. Highly compensated and academic employees are covered by the Contributory Retirement Plan (“CRP”). Other employees are covered by the Retirement Income Plan for Employees (“RIPE”). Employees are required to participate by contributing a percentage of their salary. The University, in turn, contributes additional amounts to each employee’s account. The University did not report, withhold, or remit FICA payroll taxes on any of the amounts contributed to the CRP or RIPE in the period 2000-2003. In 2005, the IRS assessed the University with additional FICA taxes and penalties. The University paid a portion of the assessment. The IRS assessed penalties for the University’s failure to pay the full amount. The University again paid only a portion of the assessment. The IRS denied the University’s claim for a refund. The University filed suit. The IRS filed a counterclaim for the still unpaid portions of the assessed amounts. The district court granted summary judgment to the United States. It held the University liable for all the assessed unpaid taxes and penalties. The University appeals.
In their opinion, Judges Kanne, Sykes, and Tinder affirmed. The Court started with the definition of “wages” in the Internal Revenue Code, one of its exceptions, and an exception to that exception. “Wages” includes “all remuneration for employment” but excludes payments made to an employee “under or to an annuity contract.” That exception itself has an exception for annuity contracts “made by reason of a salary reduction agreement.” The University takes the position that its payments to the CRP and RIPE are not wages, and therefore not subject to FICA, under the annuity contract exception to "wages." It also contends that the contributions are not excluded from the annuity contract exception under the “salary reduction agreement” language. The University’s position is that a salary reduction “agreement” must be a voluntary agreement by an employee to accept a reduced salary in return for the contribution to the plan. To resolve the issue, the Court considered the plain language of the exception as well as its context. It first rejected the University’s argument that the plain language of the statute and the use of the word “agreement” must lead to the single conclusion that the contribution must be voluntary. In fact, the Court found that the plain language was more closely aligned with the government’s position that it simply distinguished between salary supplements and salary reductions. The Court then “wade[d] into the murky waters of ‘context’” in the tax code to see if the context supported a different conclusion. After considering prior statutory provisions, revenue rulings, cross-references, and court decisions, the Court concluded that Congress intended “salary reduction agreements” to include both mandatory and voluntary agreements. Since the University failed to properly withhold FICA taxes from its employees, it is liable for both its and its employees’ contributions. The University is excused from paying the employees’ share if it can demonstrate that the obligation was speculative and not precise. Relying on the plain language and the same “context” it examined in reaching a decision on the merits, the Court rejected the University’s argument and held it liable for the assessed taxes.
The IRS also imposed both failure-to-deposit and failure-to-pay penalties. The former addressed the University’s original failure to withhold and deposit the required amounts. The latter addressed the University’s failure to pay the amount assessed. The Court noted that both penalties are required by law unless a taxpayer carries the “heavy burden” of showing that it exercised “ordinary business care and prudence.” The Court held that the University’s “unsupported and unreasonable” interpretation did not met that burden. Finally, the Court rejected the University’s argument that the “divisable tax doctrine” is incompatible with the failure-to-pay penalty. Under the “divisable tax doctrine,” a taxpayer is allowed to challenge an assessed tax without paying the full amount of the assessment, which is generally a jurisdictional requirement. If the tax is divisable, a taxpayer can pay the full amount for one transaction and have the result of its challenge to that transaction control the other transactions. Here, the tax was divisable and the University was able to have its day in court without having to remit the full assessed amount of taxes. Having lost its case, however, the University is still subject to penalties on the unpaid amount.
