No , IN THE UNITED STATES COURT OF APPEALS FOR THE EIGHTH CIRCUIT

Transcription

1 No , IN THE UNITED STATES COURT OF APPEALS FOR THE EIGHTH CIRCUIT MICHAEL D. LOOS, Plaintiff-Appellant/Cross-Appellee, V. BNSF RAILWAY COMPANY, Defendant-Appellee/Cross-Appellant. On Appeal from the United States District Court for the District of Minnesota (Minneapolis) Case No PAM Hon. Paul A. Magnuson, Chief United States District Judge AMICUS CURIAE BRIEF OF THE AMERICAN ASSOCIATION FOR JUSTICE IN SUPPORT OF PLAINTIFF-APPELLANT AND AFFIRMANCE OF DISTRICT COURT'S ORDER DENYING DEFENDANT'S MOTION FOR COLLATERAL SOURCE OFFSET Larry A. Tawwater AMERICAN ASSOCIATION FOR JUSTICE 777 6th Street N.W. - Suite 200 Washington, DC (202) President, American Association for Justice Jeffrey R. White Counsel of Record CENTER FOR CONSTITUTIONAL LITIGATION, P.C th Street N.W. - Suite 250 Washington, DC (202) jeffrey.white@cclfirm.com Attorney for Amicus Curiae Appellate Case: Page: 1 Date Filed: 05/31/2016 Entry ID:

2 CORPORA TE DISCLOSURE STATEMENT Pursuant to Federal Rule of Appellate Procedure 26 and Eighth Circuit Rule 26.l(a), Amicus Curiae American Association for Justice ("AAJ") states: 1. AAJ discloses that it is a non-profit organization organized under the laws of the District of Columbia. 2. AAJ has no parent corporation and issues no stock. Date: May 27, 2016 Respectfully submitted, ls/jeffrey R. White Jeffrey R. White Counsel of Record CENTER FOR CONSTITUTIONAL LITIGATION, P.C th Street N.W. - Suite 250 Washington, DC (202) j effrey. white@cclfirm.com Attorney for Amicus Curiae Appellate Case: Page: 2 Date Filed: 05/31/2016 Entry ID:

3 TABLE OF CONTENTS CORPORA TE DISCLOSURE STATEMENT... i TABLE OF CONTENTS... ii TABLE OF AUTHORITIES... iv STATEMENT OF INTEREST OF AMICUS CURIAE... 1 ARGUMENT... 2 I. Damages Awarded in FELA Actions on Account of Physical Injury Are Not "Income" and Therefore Not Subject to Employment Taxes, Including Railroad Retirement Taxes... 2 A. Internal Revenue Code 104(a)(2), which excludes awards for lost wages on account of personal injury from "income," governs this case... 2 B. The plain text, history, and Congressional purpose of 104(a)(2) support the exclusion of awards for lost wages from both income and payroll taxes, including RR TA payroll taxes... 5 II. Plaintiff's FELA Award for Lost Wages Is Not Taxable Compensation for RRTA Purposes, but Instead Is Not Taxable on the Same Basis that Injury Awards Generally Are Not Subject to Federal Employment Taxes... 9 A. The definition of compensation in the Railroad Retirement Act does not trump the definition of income in the Internal Revenue Code B. Awards for lost wages on account of personal injury are not subject to federal payroll taxes, including Railroad Retirement taxes Awards for lost wages should be treated consistently with respect to income tax and employment taxes Decisional law overwhelmingly holds that receipts excludable under I.R.C. 104(a)(2) are also excluded from federal employment taxes The previously stated position of the I.R.S. has been that receipts excludable from income under I.R. C. 104 are also excluded from federal employment taxes Appellate Case: Page: 3 Date Filed: 05/31/2016 Entry ID:

4 III. Permitting an Offset for RRTA Tax Withholding Will Undermine the Collateral Source Rule Regarding Railroad Disability Payments CONCLUSION CERTIFICATE OF COMPLIANCE STATEMENT THAT BRIEF IS VIRUS-FREE CERTIFICATE OF SERVICE Appellate Case: Page: 4 Date Filed: 05/31/2016 Entry ID:

5 TABLE OF AUTHORITIES Cases Andress v. United States, 198 F. Supp. 371 (N.D. Ohio 1961)... 8 Canisius College v. United States, 799 F.2d 18 (2d Cir. 1986) Capovilla v. Railroad Retirement Board, 924 F.2d 885 (9th Cir. 1991) Central Illinois Publication Service Co. v. United States, 435 U.S. 21 (1978)... 13, 14 Commissioner of Internal Revenue v. Schleier, 515 U.S. 323 (1995)... 8 Commissioner v. Glenshaw Glass Co., 348 U.S. 426 (1955)... 5, 6 Cowden v. BNSF Railway Co., No. 4:08CV01534, 2014 WL (E.D. Mo. July 7, 2014)... 3, 4 CSX Corp. v. United States, 518 F.3d 1328 (Fed. Cir. 2008)... 16, 18 Davila v. BNSF Railway Co., 299 P.3d 798 (Kan. Ct. App. 2013) Dotson v. United States, 87 F.3d 682 (5th Cir. 1996) Eichel v. New York Central Railroad Co., 375 U.S. 253 (1963) Epmeier v. United States, 199 F.2d 508 (7th Cir. 1952)... 7 Gerbec v. United States, 164 F.3d 1015 (6th Cir.1999) Hall v. Chicago & Northwestern Railway Co., 125 N.E.2d 77 (Ill. 1955)... 7 Hance v. Norfolk Southern Railway Co., 571 F.3d 511 (6th Cir. 2009) Haynes v. United States, 353 U.S. 81 (1957)... 7 Heckman v. Burlington Northern Santa Fe Railway Co., 837 N.W.2d 532 (Neb. 2013)... 4, 5 Hisquierdo v. Hisquierdo, 439 U.S. 572 (1979)... ll IV Appellate Case: Page: 5 Date Filed: 05/31/2016 Entry ID:

6 Huddell v. Levin, 395 F. Supp. 64 (D. N.J. 1975), vacated on other grounds, 537 F.2d 726 (3d Cir. 1976)... 7 Jacques v. United States Railroad Retirement Board, 736 F.2d 34 (2d Cir. 1984) Liberatore v. Monongahela Railway Co., No. 101 l-eda-2015, 2016 WL (Pa. Super. Ct. Apr. 7, 2016) , 20 Loos v. BNSF Railway Co., No. 13-CV-3373, 2015 WL (D. Minn. Dec. 15, 2015) , 3 Louissaint v. Hudson Waterways Corp., 443 N.Y.S.2d 678 (N.Y. Sup. Ct. 1981) Loy v. Norfolk Southern Railway Co., No. 3:12-CV-96, 2016 WL (N.D. Ind. Apr. 12, 2016)....4 Marlin v. BNSF Railway Co., No. 4:14-CV-00098, 2016 WL (S.D. Iowa Jan. 29, 2016)... 3, 4, 20 Mickey v. BNSF Railway Co., 437 S.W.3d 207 (Mo. 2014) Norton v. Railroad Retirement Board, 69 F.3d 282 (8th Cir. 1995) O'Gilvie v. United States, 519 U.S. 79 (1996)... 6 Phillips v. Chicago Central & Pacific Railroad Co., 853 N.W.2d 636 (Iowa 2014)... 5 Redfield v. Insurance Co. of North America, 940 F.2d 542 (9th Cir. 1991) Roemer v. Commissioner, 716 F.2d 693 (9th Cir. 1983)... 7 Rowan Companies, Inc. v. United States, 452 U.S. 247 (1981)... 14, 15 United States v. Quality Stores, Inc., 134 S. Ct (2014)... 16, 17 Windom v. Norfolk Southern Railway Co., No. 5:10-CV-407, 2012 WL (M.D. Ga. Dec. 7, 2012)... 3 Appellate Case: Page: 6 Date Filed: 05/31/2016 Entry ID: V

7 Statutes 40 Stat U.S.C. 231 (h)(l ) U.S.C. 231(h)(2)... 10, U.S.C. 231a... ll 45 U.S.C. 23 lf I.R.C I.R.C. 61(a)... 5 I.R.C. 104(a)... 9 I.R.C. 104(a)(l) I.R.C. 104(a)(2)... 3, 5, 16, 18 I.R.C I.R.C. 3121(a) I.R.C. 3121(a)-(a)(19) I.R.C I.R.C I.R.C. 3202(a)... 9 I.R.C I.R.C. 3402(a) I.R.C. 3402(a)(l) Pub. L. No , 103 Stat Vl Appellate Case: Page: 7 Date Filed: 05/31/2016 Entry ID:

8 Pub. L. No , 110 Stat Pub. L. No , 96 Stat Pub. L. No , 97 Stat Regulations Treas. Reg (e)-l(a)(l) Other Authorities Burke, J. Martin & Michael K. Friel, Tax Treatment of Employment Related Personal Injury Awards: The Need for Limits, 50 Mont. L. Rev. 13 (1989)... 6 H.R. Rep. No. 1711, 74th Cong., 1st Sess. (1935) Hamett, Bertram, Torts and Taxes, 27 N.Y.U. L. Rev. 614 (1952)... 7 Henry, Robert J., Torts and Taxes, Taxes and Torts: The Taxation of Personal Injury Recoveries, 23 Rous. L. Rev. 701 (1986)... 6 Internal Revenue Service, Lawsuits, Awards and Settlements Audit Techniques Guide (May 2011) Internal Revenue Service, Notice 96-53, C.B. 219 (Dec ) Internal Revenue Service, Office of Chief Counsel, Memorandum PMTA (Oct. 22, 2008) Internal Revenue Service, Private Letter No (Mar. 9, 2012) Internal Revenue Service, Private Letter No (Aug. 30, 1994) Internal Revenue Service, Technical Advice Memorandum No (Nov. 1, 2002) Ireland, Thomas R., A New Class of Hybrid-Tort Actions Based on Recent FELA Decisions, 21 J. Legal Econ. 67 (2014)... 20, 22 Rev. Proc , R.B Vll Appellate Case: Page: 8 Date Filed: 05/31/2016 Entry ID:

9 Rev. Rul , C.B S. Rep. No. 1631, 77th Cong., 2d Sess. 165 (1942) Sutherland Statutory Construction (7th ed.)... 12, 13 U.S. Railroad Retirement Board, Pay For Time Lost From Regular Railroad Employment Vlll Appellate Case: Page: 9 Date Filed: 05/31/2016 Entry ID:

10 STATEMENT OF INTEREST OF AMICUS CURIAE The American Association for Justice ("AAJ") is a voluntary national bar association whose members practice in every state. AAJ members primarily represent plaintiffs in personal injury suits, as well as employment, consumer, and civil rights actions. Attorneys representing railroad workers in FELA actions are frequently AAJ members. Pursuant to Federal Rule of Civil Procedure 29(a), AAJ has received from all parties consent to the filing of this brief. Congress has seen fit to exclude payments on account of personal physical injury from income for purposes of federal income taxes. AAJ believes that for the courts to create a different rule for employment taxes or a different rule for railroad employers not only undermines the intent of Congress, but would upset settled expectation regarding the tax consequences of personal injury recoveries and make settlement agreements in FELA cases more difficult to reach. 1 1 No party's counsel authored this brief in whole or in part; no party or party's counsel, or any person other than the amicus curiae, its members, or its counsel contributed money intended to fund the preparation or submission of this brief. Appellate Case: Page: 10 Date Filed: 05/31/2016 Entry ID:

11 ARGUMENT I. Damages Awarded in FELA Actions on Account of Physical Injury Are Not "Income" and Therefore Not Subject to Employment Taxes, Including Railroad Retirement Taxes. A. Internal Revenue Code 104(a)(2), which excludes awards for lost wages on account of personal injury from "income," governs this case. AAJ addresses this Court on a single issue in this case: Whether Plaintiffs FELA award of damages for personal injury suffered on the job is subject to the Railroad Retirement Tax Act ("RRTA"), I.R.C (26 U.S.C.). That is, may a railroad, found liable for causing a plaintiffs on-the-job personal injury, receive an offset for the amount the railroad claims it is required to remit to the Internal Revenue Service for plaintiffs railroad retirement tax? Michael Loos suffered a knee injury while working as a conductor in a BNSF railyard in Minnesota. He brought suit under the Federal Employers Liability Act ("FELA") in federal district court. A jury found in plaintiff's favor, awarding him damages of $126,213, including $30,000 in lost past wages due to his injury. BNSF moved to be given an offset in the amount of $3,765 in payroll taxes which BNSF claimed was due under the Railroad Retirement Tax Act and which it was required to submit to the IRS, along with its matching employer contributions. Loos v. BNSF Ry. Co., No. 13-CV-3373, 2015 WL , at *1 (D. Minn. Dec. 15, 2015). The district court denied defendant's motion, ruling that "when an award is received for a personal injury in a tort or tort-type proceeding, the whole award is Appellate Case: Page: 11 Date Filed: 05/31/2016 Entry ID:

12 excludable from income under 26 U.S.C. 104(a), even if included in the award is an amount for lost earnings." Id. at *2 (quoting Cowden v. BNSF Ry. Co., No. 4:08CV01534, 2014 WL , at *11 (E.D. Mo. July 7, 2014)). AAJ submits that the district court in this case correctly held that I.R.C. 104(a)(2), which provides that "gross income does not include... the amount of any damages ( other than punitive damages) received... on account of personal physical injuries or physical sickness," controls and resolves the issue before this Court. The FELA was enacted in The Railroad Retirement Act was passed in 1934, 48 Stat. 1283, and the Railroad Retirement Taxing Act (then known as the Railroad Retirement and Carriers' Taxing Acts) was adopted in The notion that FELA recoveries might be subject to RRTA payroll taxes and that railroad employers should be credited with an offset in the amount of the employee's share of those taxes was beyond the contemplation of any court prior to Windom v. Norfolk Southern Railway Co., No. 5:10-CV-407, 2012 WL , at *2 (M.D. Ga. Dec. 7, 2012). The district court in that case disallowed the railroad's claimed offset. Subsequently, seven other courts have addressed this issue, and the majority have held that lost wages recovered for personal injury are excluded from RR TA taxes. The district court in Marlin v. BNSF Railway Co., No. 4:14-CV-00098, 2016 WL (S.D. Iowa Jan. 29, 2016), reasoning that "because wages are a subset of income," plaintiffs jury award "is excludable from RRTA withholdings under 3 Appellate Case: Page: 12 Date Filed: 05/31/2016 Entry ID:

13 104(a)(2)." Id. at *3 & *5. In Mickey v. BNSF Railway Co., 437 S.W.3d 207 (Mo. 2014) (en bane), the Missouri Supreme Court, en bane, agreed, explaining: "[C]ompensation" received as a part of a personal injury judgment is not subject to RRTA withholding taxes for the same reason that lost wages received as part of a personal injury judgment are not subject to FICA withholding taxes... This is because the lost wages damages award is excluded from income under section 104(a)(2) of the Code, and a payment that does not qualify as income cannot qualify as wages. Id. at 212. The district court in Cowden v. BNSF Ry. Co., No. 4:08CV01534, 2014 WL (E.D. Mo. July 7, 2014), also held that the plaintiffs verdict in an FELA action "is excluded from 'income' in whole under 26 U.S.C. 104(a)(2)" and therefore is not subject to RRTA withholding taxes. Id. at *12. Most recently, the northern district of Indiana followed the same rationale and held that plaintiffs FELA recovery is not subject to RRTA taxes. Loy v. Norfolk S. Ry. Co., No. 3:12- CV-96, 2016 WL , at *5 (N.D. Ind. Apr. 12, 2016). Three decisions have ruled to the contrary, adopting the railroads' argument that any receipts that may be classified as "compensation" are subject to RRTA taxes, even if not "income" for income tax purposes. In Liberatore v. Monongahela Railway Co., No. 101 l-eda-2015, 2016 WL (Pa. Super. Ct. Apr. 7, 2016), the superior court stated that "an award for lost time due to personal injury is... taxable under the RRTA." Id. at *12. In Heckman v. Burlington Northern Santa Fe Railway Co., 837 N.W.2d 532 (Neb. 2013), the Supreme Court of Nebraska held 4 Appellate Case: Page: 13 Date Filed: 05/31/2016 Entry ID:

14 that the plaintiffs "entire [FELA] award was compensation subject to RRTA taxation." Id. at 543. In Phillips v. Chicago Central & Pacific Railroad Co., 853 N.W.2d 636, 652 (Iowa 2014), the Iowa Supreme Court ruled that "time lost is properly taxed as compensation under the RRTA." Id. at 652. It is clear that the dividing point between these lines of cases is the minority's view that the treatment of lost time as taxable "compensation" trumps the Internal Revenue Code's treatment of lost time as not "income" and therefore not taxable. 2 AAJ suggests that the slight majority view is, in fact, far more persuasive. B. The plain text, history, and Congressional purpose of 104(a)(2) support the exclusion of awards for lost wages from both income and payroll taxes, including RRTA payroll taxes. Congress has "imposed [ federal income tax] on the taxable income" of individuals. I.R.C. (26 U.S.C.) 1 (emphasis added). I.R.C requires that "every employer making payment of wages shall deduct and withhold" income tax from such wages. When Congress declared that "gross income means all income from whatever source derived," I.R.C. 61(a), it cast a very wide net. Comm 'r v. Glenshaw Glass Co., 348 U.S. 426, (1955). Nevertheless, Congress specifically excluded from the definition of "income": [ A ]ny damages ( other than punitive damages) received ( whether by suit or agreement and whether as lump sums or as periodic payments) on account of personal physical injuries or physical sickness. 2 Neither Phillips nor Heckman even referred to 104(a)(2). Appellate Case: Page: 14 Date Filed: 05/31/2016 Entry ID:

15 I.R.C. 104(a)(2). This provision dates back to 213(b )( 6) of the Revenue Act of Its legislative history indicates that Congress intended to codify Treasury Department decisions viewing the human body as a kind of capital asset and injury compensation payments as "roughly correspond[ing] to a return of capital." Comm 'r, 348 U.S. at n.8. See also O'Gilvie v. United States, 519 U.S. 79, (1996); J. Martin Burke & Michael K. Friel, Tax Treatment of Employment-Related Personal Injury Awards: The Need for Limits, 50 Mont. L. Rev. 13, (1989) (discussing the origin of this exclusion in depth). At bottom, the exclusion of personal injury awards recognizes that such awards do not confer additional income on the plaintiff, but merely return him or her to the position pre-injury. Robert J. Henry, Torts and Taxes, Taxes and Torts: The Taxation of Personal Injury Recoveries, 23 Rous. L. Rev. 701, (1986). Congress has revisited and amended 104(a)(2) in recent decades. For example, Congress amended the section in 1983 to extend its operation to include periodic payment settlements. Pub. L. No , 96 Stat. 2605, 1605(b). In 1989, Congress limited the excludability of punitive damages. Pub. L. No , 103 Stat. 2106, 7641(a). Further amendments in 1996 removed punitive damages entirely, added the requirement that injuries or sickness be "physical," and provided that emotional distress shall not be treated as a physical injury or physical sickness. Pub. L. No , 110 Stat. 1755, 1605(a) & (b). Yet, on each occasion, 6 Appellate Case: Page: 15 Date Filed: 05/31/2016 Entry ID:

16 Congress deliberately retained the exclusion of damages for lost wages in recoveries on account of personal injury. Justice Black, writing for the Court in Haynes v. United States, 353 U.S. 81 (1957), explained that, in keeping the exclusion, Congress undoubtedly "intended to relieve a taxpayer who has the misfortune to become ill or injured, of the necessity of paying income tax" on payments received on account of those harms. Id. at n.3 (quoting Epmeier v. United States, 199 F.2d 508, 511 (7th Cir. 1952)). Congress clearly recognized that a "societal purpose would be served by benefiting innocent victims of tortious conduct." Huddell v. Levin, 395 F. Supp. 64, 87 (D.N.J. 1975), vacated on other grounds, 537 F.2d 726 (3d Cir. 1976). Lawmakers therefore made "a considered decision" and a "policy choice [that] damages recoverable for loss of earnings [be] expressly excluded from gross income." Id. at 88 n.33 (internal quotation omitted) (emphasis added). On that basis, the exclusion is now widely viewed as based on the "clear intent on the part of Congress to confer a benefit upon an injured party by making his recovery tax-free." Louissaint v. Hudson Waterways Corp., 443 N.Y.S.2d 678, 682 (N.Y. Sup. Ct. 1981). See also Roemer v. C.I.R., 716 F.2d 693, 696 n.2 (9th Cir. 1983) (the 104(a)(2) exclusion reflects "compassion" of Congress); Hall v. Chicago & Nw. Ry. Co., 125 N.E.2d 77, 86 (Ill. 1955) ("the very Congressional intent of [I.R.C. 104(a)(2) is] to give an injured party a tax benefit"); Bertram Hamett, Torts and Taxes, 27 N.Y.U. L. Rev. 614, 627 (1952) (The exclusion reflects 7 Appellate Case: Page: 16 Date Filed: 05/31/2016 Entry ID:

17 the view of Congress that "taxation of recoveries carved from pain and suffering is offensive."). For this reason, while "it is generally true that statutes allowing deductions from gross income are strictly construed," courts "have been liberal in construing Congressional enactments intended to give tax relief to injured or sick employees." Andress v. United States, 198 F. Supp. 371,376 (N.D. Ohio 1961) (internal quotation omitted). BNSF argues that excluding plaintiffs recovery for lost wages from taxation is illogical: "Had Plaintiff actually worked for BNSF during the periods for which he sought past wages as a result of his injury, his paid compensation indisputably would have been subject to the RRTA withholding taxes." BNSF Br. 57. But that is precisely the meaning of the plain text of 104( a), and is precisely the "tax break" or "tax benefit" Congress intended to confer upon injured plaintiffs. As the Supreme Court has explained, where a taxpayer has received an award for personal injury, "the recovery for lost wages is also excludable as being 'on account of personal injuries,' as long as the lost wages resulted from time in which the taxpayer was out of work as a result of her injuries." Comm 'r of Internal Revenue v. Schleier, 515 U.S. 323, 329 (1995). Schleier, indeed, controls this issue in this case. Contrary to BNSF's contention, the Railroad Retirement Tax does not "impose[] payroll taxes on 'compensation' received by an employee," BNSF Br. 57. Rather, the RRTA imposes 8 Appellate Case: Page: 17 Date Filed: 05/31/2016 Entry ID:

18 the Tier 1 and Tier 2 taxes on the employee's "income." 3 The only role played by the term "compensation" is set out in the following section, which requires that those taxes "shall be collected by the employer of the taxpayer by deducting the amount of the taxes from the compensation of the employee." I.R.C. 3202(a). Thus, 104(a)(2) requires this Court to hold that an FELA award for lost wages is not "income" and therefore not subject to RRTA payroll taxes. II. Plaintiff's FELA Award for Lost Wages Is Not Taxable Compensation for RRTA Purposes, but Instead Is Not Taxable on the Same Basis that Injury Awards Generally Are Not Subject to Federal Employment Taxes. There is no question that Michael Loos' s personal injury award is excluded from the definition of "income" for federal income tax purposes under I.R.C. 104(a). Nevertheless, BNSF contends that, regardless of whether plaintiffs FELA award is "income" for purposes of federal income taxes, "the award for lost wages falls within the definition of compensation for purposes of the RRTA," and "the definition of 'compensation' in the RRTA is controlling here." BNSF Br. 57, I.R.C provides: (a) (b) Tier 1 tax.-in addition to other taxes, there is hereby imposed on the income of each employee a tax equal to... Tier 2 tax.-in addition to other taxes, there is hereby imposed on the income of each employee a tax equal to... ( emphasis added). Appellate Case: Page: 18 Date Filed: 05/31/2016 Entry ID:

19 AAJ contends, to the contrary, that receipts that are not income can be neither wages nor "compensation" for purposes of the RRTA. A. The definition of compensation in the Railroad Retirement Act does not trump the definition of income in the Internal Revenue Code. There is no sound basis for defining an award for lost wages as not income for federal income tax purposes while applying an entirely different definition of wages that makes them subject to payroll taxes. The text of the RRTA statute, controlling U.S. Supreme Court precedent, and even the I.R.S.'s own previously stated positions compel the commonsense result that damage awards that are excluded from "income" and "wages" for income tax purposes are also excluded from "compensation" or "wages" for purposes of employment taxes, including RRTA taxes. The proposition that lost time is taxable compensation does not appear in the tax statute. BNSF relies instead on the Railroad Retirement Act, 45 U.S.C. 231(h)(l) & (2). 4 BNSF Br. 59. The RRA, however, is an entirely separate statute which exists for an entirely different purpose. 4 The RRA defines "compensation" to "include[] remuneration paid for time lost as an employee." 45 U.S.C. 231(h)(l). An employee "shall be deemed to be paid 'for time lost' the amount he is paid by an employer with respect to an identifiable period of absence from the active service of the employer, including absence on account of personal injury." 45 U.S.C. 231(h)(2). 10 Appellate Case: Page: 19 Date Filed: 05/31/2016 Entry ID:

20 Congress provided a benefits program for railroad workers funded by employee and employer contributions in lieu of participation in the Social Security system. The Tier 1 program is closely patterned after Social Security; 5 Tier 2 is analogous to a private pension program. Hance v. Norfolk S. Ry. Co., 571 F.3d 511, 522 (6th Cir. 2009). Congress "felt that the Act would encourage older workers to retire by providing them with the means 'to enjoy the closing days of their lives with peace of mind and physical comfort"' as well as open up jobs for younger workers. Hisquierdo v. Hisquierdo, 439 U.S. 572, 573 (1979) (quoting H.R. Rep. No. 1711, 74th Cong., 1st Sess., at 10 (1935)). Congress in a separate statute, the Railroad Retirement Act, 45 U.S.C. 231, established the Railroad Retirement Board, to disburse benefits from the retirement account and to determine whether an employee has met the benefit eligibility requirements. For example, to qualify for the maximum pension benefit, the employee must be credited with 360 months of service. See 45 U.S.C. 23 la & 231 f. It is the responsibility of the Board to determine whether an employee has achieved the requisite length of service. In this context, the RRA provides that an employee shall be deemed to have been paid "compensation" for time lost due to 5 Like Social Security and Medicare taxes for most workers, Tier I, Tier II, and RRB Medicare taxes involve matching payments by both railroad worker and railroad employer. Tier I taxes exactly match Social Security taxes at 6.2% up to a maximum ( currently about $118,500 per year) and Medicare taxes are 1.45% on all income earned. 11 Appellate Case: Page: 20 Date Filed: 05/31/2016 Entry ID:

21 "absence on account of personal injury." 45 U.S.C. 23l(h)(2). The Railroad Retirement Board has made clear that the fact that proceeds are creditable for pension purposes does not mean they are taxable for RRTA. U.S. R.R. Retirement Bd., Pay For Time Lost From Regular Railroad Employment, at 9, available at ("There are circumstances where pay for time lost may be fully creditable under the Railroad Retirement Act, but taxable only to a limited extent, or not taxable at all, under the Railroad Retirement Tax Act."). Implicitly recognizing that it is asking this Court to import what it views as the controlling definition regarding taxability from a non-tax statute, BNSF asserts that the "RRA and RRTA should be read inpari materia." BNSF Br. 60. In support, BNSF cites this Court's decision in Norton v. Railroad Retirement Board, 69 F.3d 282, 283 (8th Cir. 1995), as well as Capovilla v. Railroad Retirement Board, 924 F.2d 885, (9th Cir. 1991); and Jacques v. United States Railroad Retirement Board, 736 F.2d 34, (2d Cir. 1984). However, all of those decisions deal solely with the calculation of pension benefits and do not even mention tax or the RR TA. Moreover, the most important characteristic of statutes that may be read in pari materia is that the provisions "have the same purpose or object." 2B Sutherland Statutory Construction 51:3 (7th ed.). In this instance, the purposes of the statutes are sharply different. The RRA uses a broad interpretation of lost time and compensation for the purpose of maximizing the credits toward pension benefits. The RRTA does not share that purpose. Its object, like that of the Revenue Code 12 Appellate Case: Page: 21 Date Filed: 05/31/2016 Entry ID:

22 generally, is to obtain revenue according to the rules set by Congress. BNSF's facile assertion that the two statutes are merely two sides of the same coin, taxation and expenditure, BNSF Br. 60, is unconvincing. "Courts routinely find that several acts treating the same subject, but having different objects, are not in pari materia." Sutherland, supra, at 51: 3. There is nothing to suggest that this Court should import definitions from non-tax provisions of the U.S. Code to resolve taxability questions. B. Awards for lost wages on account of personal injury are not subject to federal payroll taxes, including Railroad Retirement taxes. 1. Awards for lost wages should be treated consistently with respect to income tax and employment taxes. It is well settled that personal injury awards, including liability payments for lost wages, are not subject to federal payroll taxes (FICA taxes) that fund Social Security. There is no plausible reason to believe that Congress intended to give lost wages different and inconsistent treatment with respect to RRTA payroll taxes. For courts to give multiple and conflicting definitions to terms Congress has used in closely related and similarly worded sections in the Tax Code does violence to the plain meaning of the statutory language and undermines the congressional goals of simplicity and ease of administration of these tax provisions. The Supreme Court has observed that Congress adopted a specific definition of "wages" in 3402(a)(l) that is much narrower than income. Central Ill. Pub. Serv. Co. v. United States, 435 U.S. 21, 29 (1978). Moreover, Congress deemed the lost wages awarded on account of personal injury "in the interest of simplicity and 13 Appellate Case: Page: 22 Date Filed: 05/31/2016 Entry ID:

23 ease of administration" as not taxable. Id. (quoting S. Rep. No. 1631, 77th Cong., 2d Sess. 165 (1942)). "An expansive and sweeping definition of wages,... is not consistent with" those objectives. Id. at 31. Thus, even if no court had addressed this matter of statutory construction, the plain text alone compels this court to hold that "income" and "wages" ( or "compensation") carry the same meaning for purposes of income tax and employment tax. In this instance, the U.S. Supreme Court and federal courts of appeals have interpreted these provisions in just such a commonsense fashion. 2. Decisional law overwhelmingly holds that receipts excludable under I.R. C. 104(a)(2) are also excluded from federal employment taxes. BNSF contends that, while the payments to Michael Loos in this case are not "income" and not "wages" for purposes of income tax withholding, they are wages, and thus "compensation" for purposes ofrrta withholding. BNSF Br. 58 (RRTA "compensation" should include plaintiffs award for "past lost wages") & 59 ('"compensation' encompasses FELA awards for lost wages due to a workplace injury."). The Supreme Court has definitively rejected this view. The Court in Rowan Companies, Inc. v. United States, 452 U.S. 247 (1981), set forth the basic principle that Congress intended "wages" to have the same meaning for income tax and employment tax withholding. The taxpayer-employer in that case provided meals and lodging for its workers on oil rigs. The I.R.S. acknowledged that these expenditures were excluded from the workers' income and 14 Appellate Case: Page: 23 Date Filed: 05/31/2016 Entry ID:

24 thus were not wages subject to income tax withholding under I.R.C. 3402(a). 452 U.S. at However, I.R.S. regulations categorized the meals and lodging as "wages" for purposes of FICA employment tax withholding. Id. at 252. Justice Powell, writing for the Court, stated: Congress intended... to coordinate the income-tax withholding system with FICA and... did so to promote simplicity and ease of administration. Contradictory interpretations of substantially identical definitions do not serve that interest. It would be extraordinary for a Congress pursuing this interest to intend, without ever saymg so, for identical definitions to be interpreted differently. Id. at 257. The Court concluded that the "plain language and legislative histories of the relevant Acts indicate that Congress intended its definition to be interpreted in the same manner for FICA and FUTA as for income-tax withholding." Id. at 263. The treasury regulations, which employed multiple definitions of "wages," undermined the congressional aims of "simplicity and ease of administration" and were therefore invalid. Id. Two years later, Congress enacted the Social Security Amendments of 1983, Pub. L. No , 97 Stat. 65, 127 (codified as amended at I.R.C. 3121(a)-(a)(19)), which amended, I.R.C. 3121(a) to provide: Nothing in the regulations prescribed for purposes of chapter 24 (relating to income tax withholding) which provides an exclusion from "wages" as used in such chapter shall be construed to require a similar exclusion from "wages" in the regulations prescribed for purposes of this chapter. 15 Appellate Case: Page: 24 Date Filed: 05/31/2016 Entry ID:

25 The court in Canisius College v. United States, 799 F.2d 18, (2d Cir. 1986), stated that the 1983 amendment "partially codified the Rowan decision" by amending the FICA definition of wages to remove the discrepancy with the income tax definition. Id. at 21. See also CSX Corp. v. United States, 518 F.3d 1328, 1344 (Fed. Cir. 2008) (rejecting IRS's argument that Congress "legislatively overruled" Rowan). Federal courts, following Rowan, have specifically held that awards for lost wages that are excludable from gross income under 104(a)(2) are also not subject to FICA payroll taxes. In Dotson v. United States, 87 F.3d 682, 689 (5th Cir. 1996), the Fifth Circuit held, on the basis of Rowan, that the "portion of the [personal injury] settlement determined to be excludable from taxable income on remand to the district court should also be excludable from wage taxes. Damages not included in the tax code's definition of 'income' are not considered 'wages.' As such they are not taxable under FICA." See also Gerbec v. United States, 164 F.3d 1015, (6th Cir.1999) (same); Redfield v. Ins. Co. of N. Am., 940 F.2d 542, 548 (9th Cir. 1991) ( age discrimination damages that were excludable from income under the then-existing 104(a)(2) "are simply not 'income' as used in the FICA statutes."). The Supreme Court recently reaffirmed Rowan in United States v. Quality Stores, Inc., 134 S. Ct (2014). Although the case did not involve either personal injury awards or I.R.C. 104(a), but rather FICA withholding on supplemental unemployment compensation benefits, Justice Kennedy, writing for 16 Appellate Case: Page: 25 Date Filed: 05/31/2016 Entry ID:

26 the Court, upheld the principle that "the meaning of 'wages' should be in general the same for income-tax withholding and for FICA calculations." 134 S. Ct. at The previously stated position of the I.R.S. has been that receipts excludable from income under I.R. C. 104 are also excluded from federal employment taxes. Although the United States appears in this case as an amicus curiae in support ofbnsf, the previously stated position of the I.R.S. is consistent with the position AAJ advocates here. The I.R.S. has long held that "wages" for FICA purposes and "compensation" for purposes of RR TA tax withholding carry the same meaning as "wages" for federal income tax purposes. Treas. Reg (e)-l(a)(l) (26 C.F.R.) ("The term compensation [for purposes of the RRTA] has the same meaning as the term wages in [FICA]."). As the I.R.S. Chief Counsel has stated: If not income, then not wages. Amounts excludable from gross income under 104(a)(2) and non-economic damages are not wages for FICA and income tax withholding purposes. I.R.S., Office of Chief Couns., Mem. PMT A , at 8 (Oct. 22, 2008) (emphasis in original), available at With respect specifically to damages for lost wages, The Service and the courts agree that back pay is wages for FICA and income tax withholding purposes, except where received on account of a personal physical injury or physical sickness. Id. at 9 (emphasis added). 17 Appellate Case: Page: 26 Date Filed: 05/31/2016 Entry ID:

27 For example, following the 1996 amendments to 104(a)(2), the I.R.S. addressed the taxability of back pay awards in employment discrimination cases in a revenue ruling. After announcing its ruling that back pay is not excludable where not received on account of physical injury, the Service also ruled: Back pay includible in gross income under Holding (1) or (2) is ''wages'' for purposes of 3121 (Federal Insurance Contributions Act (FICA)), (federal income tax withholding), and is "compensation" for purposes of 3231 (Railroad Retirement Tax Act (RRTA)). Rev. Rul , C.B. 6. See also CSX Corp., 518 F.3d at 1331 ("Both sides agree that the term 'wages' in FI CA and 'compensation' in the RR TA have the same meaning for purposes of [ employment tax withholding]."). Recently, the I.R.S. issued a private letter ruling that payments to police and firefighters for injuries in the course of employment were excluded from gross income under 104(a)(l) and therefore not subject to withholding for federal income tax and FICA tax under I.R.S. Private Letter No (Mar. 9, 2012). Similarly, the Service has held that payments excludable from income tax under 104(a)(2) were also exempt from employment taxes. I.R.S., Private Letter No (Aug. 30, 1994). These rulings are consistent with the Service's general approach that items excluded from income for federal income tax purposes are excluded as well for employment tax purposes. For example, employer contributions to medical savings accounts "are excludable from gross income, are not subject to withholding for 18 Appellate Case: Page: 27 Date Filed: 05/31/2016 Entry ID:

28 income tax, and are not subject to other employment taxes (i.e., Social Security and Medicare taxes ("FICA"), federal unemployment tax ("FUTA") or railroad retirement tax)." I.R.S., Notice 96-53, C.B. 219 (Dec ). See also I.R.S., Lawsuits, Awards and Settlements Audit Techniques Guide 18 (May 2011) ("There is general agreement that to the extent damages are excludable from gross income, they are not subject to employment taxes."); I.R.S., Technical Advice Mem. No (Nov. 1, 2002) ("[T]o the extent damages are excludable from gross income under section 104(a)(2), they are not subject to employment taxes."). 6 In sum, Congressional purpose, decisional law, and the stated position of the IRS all hold that payments to employees for lost wages that are not income under 104(a) are also not subject to federal employment taxes. Congress has not indicated that such damages are to be treated differently for purposes of RR TA employment taxes. III. Permitting an Offset for RRTA Tax Withholding Will Undermine the Collateral Source Rule Regarding Railroad Disability Payments. Finally, AAJ submits to this Court that permitting an offset for amounts the railroad contends it will remit to the IRS in satisfaction of the employee's RRTA tax payments should not be the only-or even the primary-focus of this case. Quite 6 A technical advice memorandum is guidance furnished by the Office of Chief Counsel and represents a final determination of the position of the I.R.S., but only with respect to the specific issue in the specific case in which the advice is issued. See Rev. Proc , R.B Appellate Case: Page: 28 Date Filed: 05/31/2016 Entry ID:

29 obviously, the possible RRTA taxes involved in many FELA cases are modesthardly meriting the expense of bringing the issue to this Court. In this case, for example, where Mr. Loos won $30,000 in past lost wages, the offset sought by BNSF for payroll taxes $3, Indeed, ifbnsf were to prevail on this issue, it would be obligated to remit matching employer contributions for Tier 1 taxes and overmatching contributions on Tier 2 taxes. A forensic economist who has testified for both plaintiffs and defendants in FELA cases has offered an explanation for the railroads' insistence that FELA awards be subject to RR TA payroll taxes and the concerns this raises among attorneys representing plaintiffs. See Thomas R. Ireland, A New Class of Hybrid Tort Actions Based on Recent FELA Decisions, 21 J. Legal Econ. 67 (2014). The crucial consideration is that the parties can craft a settlement agreement that avoids characterizing any of the payment to the plaintiff as lost wages, regardless of the evidence that would have been presented at trial. As a result, plaintiff would keep somewhat more of the settlement amount, a factor that the defendant might use to pressure a plaintiff into a settlement. Id. at 78. Far more significant is the fact that, as FELA lawyers are aware, many injured workers bringing FELA claims are also receiving disability benefits under the 7 In Marlin, 2016 WL , the amount was $3,698; In Liberatore, 2016 WL , it was $10, Appellate Case: Page: 29 Date Filed: 05/31/2016 Entry ID:

30 Railroad Retirement Act. The U.S. Supreme Court in Eichel v. New York Central Railroad Co., 375 U.S. 253 (1963), held that such disability benefits are inadmissible under the collateral source rule and "would violate the spirit of the" FELA. Id. at 255. Indeed, evidence of disability payments is so prejudicial to the plaintiffs recovery that it is not admissible even for otherwise proper purposes, such as impeachment of a plaintiffs testimony. Id. at 254. On that basis, courts have consistently precluded railroads from using evidence that an FELA plaintiff has received railroad disability pension benefits. See Davila v. BNSF Ry. Co., 299 P.3d 798 (Kan. Ct. App. 2013) (citing cases). A ruling that an FELA award for lost wages is subject to withholding for RR TA payroll taxes would undermine the protection the Eichel Court sought to maintain. Professor Ireland explains, using a hypothetical case in which an FELA plaintiff was injured at age 52 and has accrued sufficient service time to qualify for $30,000 annually in disability benefits. Under Eichel, those benefits may not be offset against lost wages, nor admitted at trial for the jury to use to reduce plaintiffs recovery. However, if the award is held to be subject to RRTA taxes and the railroad remits those withheld taxes, then: The RRB informs the injured railroad worker that since he has received payments for those past and future periods of "time lost," he must now repay to the RRB all of the amounts received in previous disability pensions from the date of the injury to the date of the award. In addition, the RRB cuts off further disability benefits because the worker has been paid by the award for "time lost" to age 60. If the 21 Appellate Case: Page: 30 Date Filed: 05/31/2016 Entry ID:

31 Ireland, supra, at 77. disability benefit is assumed to be $30,000 per year, the total amount of disability benefits that the railroad worker will have lost can be estimated at $240,000 ($30,000 x 8 years). On this basis, the worker has won $400,000 in lost earnings but will lose $240,000 in reimbursed disability benefits to the date of trial, plus lost disability benefits to age 60. The amount lost by the railroad worker if this happened would be much greater than the cost of employee payroll taxes that have also been withheld and paid to the RRB from the $400,000. In that example, the injured railroad worker lost not only the amount of RR TA taxes withheld from his FELA award by the railroad, but, much more importantly, the $240,000 in disability benefits that would otherwise belong to the plaintiff under the collateral source rule. Those amounts do not, of course, go directly to the railroad. However, "[i]n the poker game of the settlement process," a judicial rule that damages for lost wages are subject to RRTA taxes ensures that "the railroad holds the best hand." Id. at 78. Thus, both to encourage settlements in FELA cases and to ensure that settlement negotiations are conducted on a level playing field, this Court should rule in accordance with the majority view that awards for lost wages in FELA cases are not subject to RRTA withholding or taxes. 22 Appellate Case: Page: 31 Date Filed: 05/31/2016 Entry ID:

32 CONCLUSION For the foregoing reasons, AAJ urges this Court to affirm the decision of the district court to deny BNSF's Motion for Collateral Source Offsets for railroad retirement taxes. Date: May 27, 2016 Respectfully submitted, ls/jeffrey R. White Jeffrey R. White Counsel of Record CENTER FOR CONSTITUTIONAL LITIGATION, P.C th Street, N.W. - Suite 250 Washington, DC (202) jeffrey.white@cclfirm.com Attorney for Amicus Curiae 23 Appellate Case: Page: 32 Date Filed: 05/31/2016 Entry ID:

33 CERTIFICATE OF COMPLIANCE This brief complies with the type-volume limitation of Federal Rules of Appellate Procedure 32(a)(7)(B) because this brief contains 5,644 words, excluding the parts of the brief exempted by Federal Rules of Appellate Procedure 32(a)(7)(B)(iii). This brief complies with the typeface requirements of Federal Rules of Appellate Procedure 32(a)(5) and the type style requirements of Federal Rule of Appellate Procedure 32(a)(6) because this brief has been prepared m a proportionally spaced typeface using Times New Roman 14 point font. STATEMENT THAT BRIEF IS VIRUS-FREE This brief has been scanned and is virus-free. ls/jeffrey R. White Jeffrey R. White Attorney for Amicus Curiae 24 Appellate Case: Page: 33 Date Filed: 05/31/2016 Entry ID:

34 CERTIFICATE OF SERVICE I HEREBY CERTIFY that on this 27th day of May, 2016, I electronically filed the foregoing brief with the Clerk of the Court for the United States Court of Appeals for the Eighth Circuit using the CM/ECF system. I certify that all participants in the case are registered CM/ECF users and that service will be accomplished by the CM/ECF system. ls/jeffrey R. White Jeffrey R. White Attorney for Amicus Curiae 25 Appellate Case: Page: 34 Date Filed: 05/31/2016 Entry ID:

35 Michael E. Gans Clerk of Court United States Court of Appeals For The Eighth Circuit Thomas F. Eagleton U.S. Courthouse 111 South 10th Street, Room St. Louis, Missouri VOICE (314) FAX (314) May 31, 2016 Mr. Jeffrey R. White CENTER FOR CONSTITUTIONAL LITIGATION Suite Sixth Street, N.W. Washington, DC Dear Counsel: RE: Michael D. Loos v. BNSF Railway Company Michael D. Loos v. BNSF Railway Company The amicus curiae brief of the American Association for Justice was received and filed on May 31, If you have not already done so, please complete and file an Appearance form. You can access the Appearance Form at Please note that Federal Rule of Appellate Procedure 29(g) provides that an amicus may only present oral argument by leave of court. If you wish to present oral argument, you need to submit a motion. Please note that if permission to present oral argument is granted, the court's usual practice is that the time granted to the amicus will be deducted from the time allotted to the party the amicus supports. You may wish to discuss this with the other attorneys before you submit your motion. MER Enclosure(s) cc: Mr. William A. Brasher Mr. Jonathan S. Cohen Ms. Marion E.M. Erickson Ms. Sally Jean Ferguson Ms. Jacqueline M. Holmes Ms. Alice Elizabeth Loughran Mr. Michael P. McReynolds Mr. Lee A Miller Ms. Noelle L. Schubert Mr. Michael F. Tello Mr. Stephen M. Warner Mr. Michael A. Wolff Michael E. Gans Clerk of Court District Court/Agency Case Number(s): 0:13-cv PAM Appellate Case: Page: 1 Date Filed: 05/31/2016 Entry ID: