Opinion ID: 3025649
Heading Depth: 3
Heading Rank: 2

Heading: Relevant IRS Revenue Rulings

Text: Both parties rely on IRS revenue rulings interpreting the Code and regulations to support their characterization of the Plan payments. We have explained that “although revenue rulings are entitled to great deference, . . . courts may disregard them if they conflict with the statute they purport to interpret or its legislative history, or if they are otherwise unreasonable.” Reese Bros., Inc. v. United States, 447 F.3d 229, 237-38 (3d Cir. 2006); see also United States v. Mead Corp., 533 U.S. 218, 228 (2001) (“The weight [accorded to an administrative] judgment in a particular case will depend upon the thoroughness evident in its consideration, the validity of its reasoning, its consistency with earlier and later pronouncements, and all those factors which give it power to persuade, if lacking power to control.”) (internal quotation marks omitted). Neither party challenges the validity of the applicable revenue rulings, but they dispute which among them is most analogous to this case. unchanged. See Rowan Cos., Inc. v. United States, 452 U.S. 247, 255, 256 n.11 (1981) 7 The University relies principally upon Revenue Ruling 58-301. In that Ruling an employer and employee entered a five-year employment contract, which both parties agreed to cancel in the second year. See Rev. Rul. 58-301, 1958-1 C.B. 23. In consideration of the employee’s relinquishment of his contract rights—which had been negotiated at the outset of the employment relationship—the employer paid the employee a lump sum. Id. The IRS held that “a lump sum payment received by an employee as consideration for the cancellation of his employment contract . . . is not subject to the [FICA] tax.” Id. The University argues that Plan payments were made in consideration for its employees’ relinquishment of their prospective contract rights and are therefore not wages, like the payments in Ruling 58-301. In response, the government points to three subsequent Revenue Rulings that distinguish and limit the applicability of Ruling 58-301. First, it cites Revenue Ruling 74-252, which involved a three-year contract providing that the employer could terminate the employee during the term of the contract if it paid the employee an amount equal to six months’ salary. See Rev. Rul. 74-252, 1974-1 C.B. 287. The employer terminated the contract before it expired, and paid the required sum under the contract in monthly payments. Id. The IRS deemed these “dismissal payments” that were “made pursuant to the provisions of the contract rather than as consideration for the relinquishment of [property] interests” and, on this basis, concluded that the payments were wages under FICA. Id. The IRS distinguished Ruling 58-301 as involving “consideration for the cancellation of the employment contract,” rather than dismissal payments provided for as part of the employment contract. Second, the government cites Revenue Ruling 75-44, in which a railroad employee received a lump sum payment as consideration for relinquishing seniority rights that he earned under his employment contract. See Rev. Rul. 75-44, 1975-1 C.B. 15. The employee acquired the rights, including the right to security in his employment, based on longevity, but he remained an “at will” employee. Id. The IRS determined that the lump sum payment constituted taxable wages, and 8 distinguished Ruling 58-301: In the instant case, the employee had acquired his relinquished employment rights through his previous performance of services whereas in Rev. Rul. 58-301, the contractual rights relinquished were acquired in the original negotiation of the contract canceled. In Rev. Rul. 58-301, the lumpsum payment was primarily in consideration of the cancellation of the employee’s original contract rights rather than primarily in consideration of the past performance of services through which the relinquished employment rights were acquired. Id. (emphasis added). Finally, the government directs our attention to Revenue Ruling 2004-110, 2004-50 C.B. 960, in which the IRS modified and superceded Ruling 58-301. Ruling 2004-110 held that payments to an employee for cancellation of the employment contract and relinquishment of contract rights are wages subject to FICA taxes. After reviewing these rulings, in addition to several others, the IRS reasoned that: [e]mployment encompasses the establishment, maintenance, furtherance, alteration, or cancellation of the employer-employee relationship or any of the terms and conditions thereof. If the employee provides clear, separate, and adequate consideration for the employer’s payment that is not dependent upon the employer-employee relationship and its component terms and conditions, the payment is not wages for purposes of FICA. . . . Under the facts presented in this ruling, the employee receives the payment as consideration for canceling the remaining period of his employment contract and relinquishing his contract rights. As such, the payment is part of the 9 compensation the employer pays as remuneration for employment. Id. Ruling 2004-110 limited Ruling 58-301 to its facts and to payments made before January 12, 2005. Id.