Opinion ID: 760493
Heading Depth: 2
Heading Rank: 2

Heading: FICA Taxation

Text: 43 The Government claims that the district court erred in finding that, as a matter of law, Federal Insurance Contributions Act (FICA) taxes, 26 U.S.C. §§ 3101 et seq., should not have been withheld from Plaintiffs' settlement distribution. The Government contends that, because the Basic Award was based upon an individual's age and seniority with Continental and because the Earnings Impairment Additur was based upon the individual's earning history, the settlement distribution was, in fact, remuneration for employment and thus wages subject to FICA taxation. 44 FICA taxes consist of a percentage of an employee's wages collected to contribute to the Social Security programs. See Rowan Cos., Inc. v. United States, 452 U.S. 247, 250 n. 2, 101 S.Ct. 2288, 68 L.Ed.2d 814 (1981). Wages consist of all remuneration for employment, including the cash value of all remuneration (including benefits) paid in any medium other than cash. 26 U.S.C.A. § 3121(a) (West Supp.1998). Employment is defined as any service, or whatever nature, performed ... by an employee for the person employing him. 26 U.S.C.A. § 3121(b) (West Supp.1998). The Fifth Circuit held, and we agree, that [d]amages not included in the tax code's definition of 'income' are not considered 'wages.'  Dotson, 87 F.3d at 689 (citing Rowan, 452 U.S. at 254, 101 S.Ct. 2288; Redfield v. Insurance Co. of North Am., 940 F.2d 542, 548 (9th Cir.1991); Anderson v. United States, 929 F.2d 648, 654 (Fed.Cir.1991)). Therefore, any portion of the settlement proceeds that are determined to be excludable from taxable income on remand should also be excludable from FICA taxes. 45 With respect to the portions of the award that are found on remand to be includable in income, only the amounts that fall within the definition of wages under FICA are subject to FICA taxation. 14 We held that two separate elements of the aggregate award would be subject to income taxation: any back wages in the Basic Award and any future wages in the Earnings Impairment Additur constituting earnings impairment awarded as a result of the firing. We now hold that any part of the award allocated on remand to either of these elements will be wages subject to FICA taxation. 46 The phrase remuneration for employment as it appears in § 3121 should be interpreted broadly. See 26 C.F.R. § 31.3121(a)-1(b) (all remuneration for employment unless specifically excepted); Social Sec. Bd. v. Nierotko, 327 U.S. 358, 365, 66 S.Ct. 637, 90 L.Ed. 718 (1946) (concluding that the phrase  'any service ... performed ... for his employer'  under the Social Security Act import[s] breadth of coverage.). We hold that the phrase remuneration for employment includes certain compensation in the employer-employee relationship for which no actual services were performed. 15 In Nierotko, the Supreme Court was faced with the issue of whether 'back pay,' which is granted to an employee under the National Labor Relations Act, shall be treated as 'wages' under the Social Security Act. Nierotko, 327 U.S. at 359, 66 S.Ct. 637. The Court held that awarded back pay qualified as wages under the Social Security Act of 1935 for purposes of receiving credit to the worker's Old Age and Survivor's Insurance account. Id. at 360, 66 S.Ct. 637. The Court reasoned that  'service' as used by Congress in this definitive phrase [of the Social Security Act] means not only work actually done but the entire employer-employee relationship for which compensation is paid to the employee by the employer. Id. at 365-66, 66 S.Ct. 637. 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. 47 Had Plaintiffs in this case actually worked for Continental during the periods for which they sought back wages and future wages lost as a result of the firing, the wages indisputably would have been subject to FICA taxation. We conclude that it would be improper to exempt Plaintiffs from mandatory FICA taxes merely because they were not employees of Continental at the time the payments were made and because the payments were not in return for actual services performed. Cf. 26 C.F.R. § 31.3121(a)-(1)(i) ([r]emuneration for employment ... constitutes wages even though at the time paid the relationship of the employer and employee no longer exists between the person in whose employ the services were performed and the individual who performed them). Therefore, any damages attributable to wages they would have received had they not been wrongly terminated should also be subject to the FICA taxes they would have paid on those wages had they not been wrongly terminated. Any other result would run contrary to the purpose of the FICA system. IV. 48 Accordingly, because we find that a portion of the settlement may be subject to federal income taxation as well as FICA taxation, we REVERSE IN PART AND AFFIRM IN PART the district court's grant of summary judgment in favor of the Government on the federal income tax issue, and AFFIRM IN PART AND REVERSE IN PART the district court's grant of summary judgment in favor of Plaintiffs on the FICA taxation issue, and REMAND the case for proceedings consistent with this opinion. 49