Court Opinion

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Opinions of the United
2007 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit

11-2-2007

Univ Pgh v. USA
Precedential or Non-Precedential: Precedential

Docket No. 06-1276

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                                             PRECEDENTIAL

          UNITED STATES COURT OF APPEALS
               FOR THE THIRD CIRCUIT

                         __________

                         No. 06-1276
                         __________

              UNIVERSITY OF PITTSBURGH

                              v.

              UNITED STATES OF AMERICA,

                          Appellant

                         __________

        On Appeal from the United States District Court
           for the Western District of Pennsylvania
             (D.C. No. 04-cv-1616; 05-cv-00499)

          District Judge: Honorable Donetta Ambrose

                         __________

                   Argued January 23, 2007

 Before: SCIRICA, Chief Judge, FUENTES, and CHAGARES,
                      Circuit Judges.

                  (Filed: November 2, 2007)

__________
Ellen P. DelSole (Argued)
Kenneth L. Green
Eileen J. O’Connor
United States Department of Justice

                               1
Tax Division
Post Office Box 502
Washington, D.C. 20044

      Attorneys for Appellant

Andrew K. Fletcher (Argued)
Pepper Hamilton
500 Grant Street, 50th Floor
Pittsburgh, Pennsylvania 15219

Kathryn M. Kenyon
Pietragallo, Bosick & Gordon
301 Grant Street
One Oxford Centre, 38th Floor
Pittsburgh, PA 15219

      Attorneys for Appellee

                         ____________

                           OPINION
____________
FUENTES, Circuit Judge.

         The issue in this case is whether early retirement
payments made by the University of Pittsburgh (the University)
to its tenured faculty are taxable as “wages” under the Federal
Insurance Contribution Act (FICA), 26 U.S.C. § 3121-28. From
1996 to 2001, the University paid over $2 million in FICA taxes
on these payments. In 2001, however, it sought a refund from
the Internal Revenue Service (IRS), on the ground that the early
retirement payments were not “wages,” but instead were “buy
outs” not subject to FICA taxes. The IRS denied the refund, and
the University filed this action in the District Court for the
Western District of Pennsylvania. The District Court granted the
University’s motion for summary judgment, concluding that the
payments were not wages, and denied the government’s cross-
motion for summary judgment. This appeal followed.

                                 2
       Because we agree with the government that the retirement
payments are within the Act’s definition of wages we will vacate
the District Court’s grant of summary judgment, and remand for
entry of judgment in favor of the government.1

I.     BACKGROUND

       The following facts are not disputed. Between 1982 and
1999, the University offered five successive Early Retirement
Plans (the Plans) to tenured faculty members and administrators,
as well as non-tenured librarians whose contracts provided an
“expectation of continued employment.” Payments under all
five Plans were made monthly, and were based on an employee’s
salary at the time of retirement, as well as length of service to the
University. In four of the Plans, participation was limited to
covered employees with at least ten years of service, between the
ages of sixty-two and sixty-nine years old. In the fifth Plan,
participation was limited to employees with twelve years of
service, who were at least sixty years old, or whose sum of
service and years of age equaled at least eighty-five. To
participate, employees were required to execute an irrevocable
Contract for Participation. Employees who held tenure were
required to relinquish their tenure rights.

       Pursuant to University policy, “tenure”
       constitutes recognition by the University that a
       person so identified is qualified by achievements
       and contributions to knowledge as to be ranked
       among the most worthy of the members of the
       faculty engaged in scholarly endeavors: research,
       teaching, professional training, or creative
       intellectual activities of other kinds.

       1
           We exercise plenary review over a district court’s
summary judgment ruling. Mortellite v. Novartis Crop Prot., Inc.,
460 F.3d 483, 488 n.3 (3d Cir. 2006). “[T]he taxpayer bears the
ultimate burden of proving, by a preponderance of the evidence,
that [the IRS’s] assessment is erroneous.” Francisco v. United
States, 267 F.3d 303, 319 (3d Cir. 2001) (internal quotation marks
omitted).

                                 3
(App. at 160-61, 181.) A non-tenured faculty member can serve
without tenure for a maximum of seven years (with some
exceptions not relevant here). After seven years, a faculty
member can be terminated for failing to meet the requirements
for tenure, or be granted tenure at the discretion of the
Chancellor and the Chief Executive of the University.

       According to the University, tenure fosters an
environment of free inquiry because, once conferred, it affords
faculty “rights and immunities,” including immunity from
termination except for cause or financial exigency. (Univ. Br. at
3.) The University also may not terminate a tenured faculty
member without a hearing that comports with standards of
procedural due process under the Fourteenth Amendment. See
Bd. of Regents v. Roth, 408 U.S. 564, 576-77 (1972); McDaniels
v. Flick, 59 F.3d 446, 454 (3d Cir. 1995).

        As noted above, the University paid over $2 million in
FICA taxes on payments under the Plans between 1996 and
2001. On November 19, 2001, the University filed claims with
the IRS for refunds totaling $2,196,942, the total amount of the
University’s FICA tax payments since 1996, including
employee-paid portions. Employees who participated in the
Plans consented to have the University seek a refund on their
behalf.

       On October 30, 2002, the IRS denied the refund request,
and on October 21, 2004, the University filed this suit in the
District Court.2 The parties filed cross-motions for summary

       2
           The District Court had jurisdiction over refund claims
pursuant to 26 U.S.C. § 6532 and 28 U.S.C. § 1346(a)(1). The
University initially commenced two separate refund actions. In the
first action, the University sought a refund of FICA taxes paid
between January 1, 1996 and December 31, 2000. In a second
action, filed on April 15, 2005, the University sought a refund of
FICA taxes paid from January 1, 2001 to June 30, 2001. In an
Order entered May 13, 2005, the District Court consolidated the
two cases under this caption, and directed that the second case be
closed.

                                4
judgment, which the Court referred to Magistrate Judge Robert
Mitchell. The Magistrate Judge recommended granting the
University’s motion with respect to Plan payments to tenured
employees, but recommended granting the government’s cross-
motion with respect to Plan payments to non-tenured librarians.

        On November 22, 2005, the District Court adopted the
Magistrate Judge’s Report and Recommendation, granting each
party’s motion for summary judgment in part, and denying each
in part. The Court entered judgment in favor of the University in
the amount of $2,088,358, plus statutory interest. Only the
government appealed.3

II.   LEGAL FRAMEWORK

      A.     “Wages” Under FICA

        The purpose of FICA taxes, as distinct from income
taxes, is to “fund a national system of social insurance that
supports important and extensive social security and medicare
health programs.” Temple Univ. v. United States, 769 F.2d 126,
130 (3d Cir. 1985). FICA taxes include a tax to fund old-age,
survivors, and disability insurance, and a tax to fund hospital
insurance. See 26 U.S.C. §§ 3101, 3111. In Temple we cited
the Senate’s comments explaining the underlying purpose of
FICA:

      “The social security program aims to replace the
      income of beneficiaries when that income is
      reduced on account of retirement and disability.
      Thus, the amount of ‘wages’ is the measure used
      both to define income which should be replaced
      and to compute FICA tax liability. Since the
      security system has objectives which are
      significantly different from the objective
      underlying the income tax withholding rules, the
      committee believes that amounts exempt from

      3
       The University does not appeal the determination that the
payments to non-tenured librarians were subject to FICA taxes.

                               5
       income tax withholding should not be exempt from
       FICA unless Congress provides an explicit FICA
       tax exclusion.”

769 F.2d at 130 (quoting S. Rep. No. 23, 98th Cong., 1st Sess.
41, reprinted in 1983 U.S.C.C.A.N. 143, 183).

        Under the Internal Revenue Code, employers and
employees are liable for payment of FICA taxes on all “wages”
that are received by an employee “with respect to employment.”
See 26 U.S.C. §§ 3101(a)-(b). Section 3121(a) defines “wages”
subject to FICA taxes as “all remuneration for employment,
including the cash value of all remuneration (including benefits)
paid in any medium other than cash.”4 Section 3121(b) defines
“employment” as “any service, of whatever nature, performed . .
. by an employee for the person employing him.”5

        The Supreme Court has interpreted the term
“employment”—a component of the definition of
wages—broadly: “The very words any service . . . performed . .
. for his employer, with the purpose of the Social Security Act in
mind import breadth of coverage.” See Social Sec. Bd. v.
Nierotko, 327 U.S. 358, 365 (1946) (internal quotation marks
omitted) (emphasis added). Nierotko concluded, specifically,
that “service” in the phrase “any service performed” means not
only work actually performed, but also “the entire
employer-employee relationship for which compensation is paid
to the employee by the employer.” Id. at 365-66. Applying this
interpretation, Nierotko held that “back pay” awarded under the
National Labor Relations Act to a wrongfully discharged
employee had to be taxed as wages under the Social Security
Act.6 See id. at 364.

       4
         Section 3121(a) lists a number of exceptions to the
“wages” category, none of which applies here.
       5
         Section 3121(b) also lists a number of exceptions to this
definition, none of which applies here.
       6
         In FICA Congress retained the definition of wages
contained in the Social Security Act of 1935, essentially

                                6
       Treasury regulations further provide that “[t]he name by
which . . . remuneration for employment is designated is
immaterial.” 26 C.F.R. § 31.3121(a)-1(c). Thus, for example,
“salaries, fees, bonuses, and commissions on sales or on
insurance premiums, are wages if paid as compensation for
employment.” Id. Likewise, “the basis upon which the
remuneration is paid is immaterial in determining whether the
remuneration constitutes wages.” Id. at § 31.3121(a)-1(d). For
example, “it may be paid on the basis of piecework, or a
percentage of profits; and it may be paid hourly, daily, weekly,
monthly, or annually.” Id. Unless remuneration for employment
is specifically excepted, it “constitutes wages even though at the
time paid the relationship of employer and employee no longer
exists between the person in whose employ the services were
performed and the individual who performed them.” Id. at §
31.3121(a)-1(i).

       B.     Relevant IRS Revenue Rulings

        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.

       C.     The Circuit Split

        This case presents an issue of first impression in our
Court. Two other Courts of Appeals have addressed these
precise questions, however, and have reached contrary
conclusions. The University relies on North Dakota State Univ.
v. United States, 255 F.3d 599 (8th Cir. 2001), which held that
early retirement payments to faculty who were required to
relinquish their tenure rights, were not wages under FICA. The
government relies on Appoloni v. United States, 450 F.3d 185
(6th Cir. 2006) which held that early retirement payments made
to public school teachers, who relinquished their statutory tenure
rights, were wages under FICA.

       In North Dakota State, the Eighth Circuit determined that
a university’s early retirement payments were made “in
exchange for the relinquishment of [the faculty’s] contractual
and constitutionally-protected tenure rights rather than as
remuneration for services to [the University].” 255 F.3d at 607.
After examining the relevant revenue rulings, the court reasoned:

       Under the terms of [North Dakota State’s] Early
       Retirement Program, the tenured faculty received a
       negotiated amount of money in exchange for . . .
       their tenure rights. They did not receive what they
       were entitled to under their contracts, which was
       continued employment absent fiscal constraints or
       adequate cause for termination. Rather, they gave
       up those rights, making this case more analogous
       to Revenue Ruling 58-301 than to Revenue Ruling
       74-252.

Id. at 607.

       The District Court adopted this reasoning, holding that

                                10
“payments made by the University . . . under the Retirement
Plans are not subject to FICA taxes . . . because, as in [North
Dakota State], the payments are analogous to Rev. Rul. 58-301,
in that they were made in exchange for the relinquishment of
contractual and constitutionally-protected tenure rights rather
than as remuneration for services to the University.” (App. at
11-12.)

       Subsequent to the District Court’s decision, the Sixth
Circuit declined to follow North Dakota State. See Appoloni,
450 F.3d 185. Appoloni summarized its reasoning as follows:

      [W]e find [it of] great significance that the tenure
      rights at issue were earned through service to the
      employer. This is for two reasons. First, we see
      no reason to differentiate tenure rights from any
      other right an employee earns through service to
      any employer. . . . [C]ourts have found the
      relinquishment of seniority rights, rights to bring
      suit, and other types of rights in exchange for a
      severance payment constitute FICA wages.
      Secondly, because these rights were earned
      through service rather than contracted for at the
      time of employment, this suggests Rev. Rul. 75-44
      is more on point than Rev. Rul. 58-301.

      We also want to again emphasize the importance
      of the school district’s principal purpose in
      offering these severance payments. The school
      district’s purpose here was not to “buy” tenure
      rights. It was to induce those at the highest pay
      scales to voluntarily retire early. Relinquishment
      of tenure rights was incidental to the acceptance of
      the severance payment. A school district could not
      offer an early retirement payment and permit the
      teacher to keep his/her tenure and remain
      employed.

450 F.3d at 19596 (footnote and citations omitted).

                               11
III.   ANALYSIS

        The weight of authority holds that compensation paid to
an employee for services to her employer constitutes wages
under FICA regardless of whether it is prospective (for lost
earning potential), or retrospective (as a reward for past
service).7 For the following reasons, we conclude that the
relinquishment of tenure rights—although a condition precedent
to the payments—does not alter the Plan payments’ character as
compensation for services, and therefore as wages.

       First, the eligibility requirements for payments under the
Plans are linked to past services at the University, not
relinquishment of tenure. As Appoloni explained, “[i]n
determining whether a payment constitutes wages, courts have
looked to eligibility requirements, specifically longevity, as an

       7
         See, e.g., Nierotko, 327 U.S. at 365-66 (remuneration for
employment includes “not only work actually done but the entire
employer-employee relationship for which compensation is paid to
the employee by the employer”); Appoloni, 450 F.3d at 190 (“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.”); Assoc. Elec. Coop., Inc. v. United
States, 226 F.3d 1322, 1328 (Fed. Cir. 2000) (holding that
payments to employees under voluntary “early out” plan were
related in part to the employees’ prior service to Associated and,
for this and other reasons, were taxable as wages); Gerbec v.
United States, 164 F.3d 1015, 1026 (6th Cir. 1999) (determining
that compensation for lost “back wages” or “future wages” is
taxable under FICA); Rev. Rul. 75-44, 1975-1 C.B. 15 (holding
that payments for relinquishment of seniority rights acquired
through employee’s provision of past services are wages); cf. North
Dakota State, 255 F.3d at 606 (characterizing tenure as the start of
a new employment relationship, not payment in kind for past
services, and therefore not taxable as wages).

                                12
important factor.” 450 F.3d at 191.8 In this case, there is no
dispute that eligibility for the Plans, for both tenured and non-
tenured Plan participants, was based on the employee’s age and
years of service. These requirements link the Plan payments to
past services for the employer, not the specific rights being
relinquished, and weigh heavily in favor of treating the payments
as wages.9

       8
          See also Associated Electric, 226 F.3d at 1328 (noting that
while the method of computing severance payments, including the
length of service and pay rate, were not “dispositive,” the method
is “a relevant factor in determining whether the payments constitute
‘wages’”); Abrahamsen v. United States, 228 F.3d 1360, 1365
(Fed. Cir. 2000) (stating, where employee’s severance payments
were derived from a formula based on the employee’s salary and
years of service, that this “associate[d] the payments with the
employer-employee relationship” and strongly supported the
holding that payments were wages); Hemelt v. United States, 122
F.3d 204, 210 (4th Cir. 1997) (“[K]ey factors in determining the
amounts of each award were the length of each employee’s tenure
with Continental and the salary he received from Continental. . . .
[B]ecause the payments from Continental to taxpayers and other
class members arose out of their employment relationship, they fit
within the statutory and regulatory definition of wages . . . .”);
Sheet Metal Workers Local 141 v. United States, 64 F.3d 245, 250-
51 (6th Cir. 1995) (holding that distributions from a union
unemployment benefit fund were wages because eligibility was
contingent on employees’ length of service, and because
“eligibility requirements provide the most accurate test to
determine whether a payment is truly in consideration for
services”).
       9
           This is arguably different than the plans described in
North Dakota State, for which “past performance and current salary
were not the only factors considered in determining the amount of
early retirement payments; in fact there was no limit on what
factors could be considered.” 255 F.3d at 607 (emphasis added).
Here, even assuming the University could have relied on other
eligibility requirements, it chose to rely on ones that suggest the
Plan payments were wages.

                                 13
        Second, the Plans themselves make clear that the
payments were viewed as compensation for service to the
University. For example, the face of the 1998-2002 Plan reveals
that an important motivation for the Plans was to keep the
University’s compensation package competitive with peer
universities. See University Board of Trustees Resolution
Approving Implementation of 1998-1999 Retirement Plans,
App. at 159, 256 (resolving that 1998-2002 plan would be last
plan approved because the University “does have a favorable
retirement plan compared to peer universities”). Also, the 1983
Plan states that, in addition to making room for new faculty, the
University offered the Plan because it “deem[ed] it desirable and
appropriate to provide maximum flexibility and opportunities for
its faculty members to retire voluntarily prior to the mandatory
retirement age.” App. at 209. Subsequent plans state a similar
desire to reward valued faculty members.

       To the extent the payments are a reward for service—as
the Plans themselves indicate—they qualify as wages:
“Payments for hard work and faithful service arise directly from
the employee-employer relationship and are payments which
recognize the value or character of the services performed for the
employer.” Associated Electric, 226 F.3d at 1327 (finding
manager’s testimony that early out payments were “the right
thing to do [because] [t]hese people had worked hard, and were
good people,” indicated payments were reward for past service
and therefore wages) (second alteration in original).

       Third, even if the University made the payments in part
to secure relinquishment of tenure rights, their main purpose was
to provide for employees’ early retirement. In this way, they
were indistinguishable from severance payments, which are
generally taxed as wages. In this regard, we agree with the Sixth
Circuit’s statement in Appoloni that it

       fail[ed] to see how this is different from other
       severance packages just because a “tenure” right
       was exchanged. In almost all severance packages
       an employee gives up something, and we have a
       hard time distinguishing this case from similar

                               14
       cases where an employee, pursuant to a severance
       package, gives up rights in exchange. Courts have
       consistently held that severance payments for the
       relinquishment of rights in the course of an
       employment relationship are FICA wages. In fact,
       we are at a loss to find a case, other than the
       Eighth Circuit’s decision, to hold otherwise.

450 F.3d at 193. This reasoning is consistent with numerous
cases treating payment for the relinquishment of rights gained
over the course of employment—including severance packages
requiring waiver of all rights to sue—as wages.10

       The University seeks to distinguish these accrued-
seniority and severance cases on the ground that the employees
had “at will” employment contracts, whereas here, “tenure is
obligatory for the University, optional with the faculty member.”

       10
            See, e.g., Abrahamsen, 228 F.3d at 1364-65 (“[T]he
payments at issue were at least partially motivated by IBM’s desire
to settle any claims [of] departing employees . . . . The employees,
however, have failed to demonstrate that . . . they constituted
settlement payments instead of severance payments made to
compensate for the employer-employee relationship.”); id. at 1362
(describing the breadth of employees’ release of claims “arising
from the Age Discrimination in Employment Act of 1967, as
amended, Title VII of the Civil Rights Acts of 1964, as amended,
and any other federal or state law dealing with discrimination in
employment on the basis of sex, race, national origin, religion,
disability, or age;” as well as “claims based on theories of contract
or tort, whether based on common law or otherwise”); Associated
Electric, 226 F.3d at 1328 (determining that payments made to
union employees “in exchange for valuable rights, i.e., the union’s
promise not to strike,” were FICA wages); CSX Corp. v. United
States, 52 Fed. Cl. 208, 221 (Fed. Cl. 2002) (declining to follow
North Dakota State and explaining that “[b]ecause . . . rights [to
vacation pay, sick pay, layoff pay, and seniority] . . . are integral to
the employment relationship—they are part and parcel of the job
protections and job benefits . . . [and therefore] they must be
considered wages”).

                                  15
(Univ. Br. at 4; App. at 202.) This distinction misses the point.
Regardless of whether an employee voluntarily ended the
employment relationship, or whether the employee had a due
process right to maintain his employment, the rights relinquished
were gained through the employee’s past services to the
employer.

       In this way, the tenure rights relinquished in this case are
most like the seniority rights relinquished in Revenue Ruling 75-
44. That Ruling drew an important distinction between
payments made for relinquishment of contract rights acquired at
the negotiation of a contract (as in Ruling 58-301), which are not
FICA wages, and payments for the relinquishment of rights
acquired over the duration of an employment contract (as in
Ruling 75-44), which are FICA wages. The Plan payments here
compensate employees for relinquishment of tenure rights
acquired through past service, and for this reason are most like
the payments in Ruling 75-44.11

       Fourth, and relatedly, we reject the University’s
suggestion that because tenure is wholly discretionary and
affords new rights to the recipient, it is necessarily the start of a
new employment relationship, like the five-year contract in
Revenue Ruling 58-301. The University’s policy on
“Appointment and Tenure” shows that the award is contingent
on past performance and is more like a promotion than an
entirely new contract:

       Academic tenure is a status accorded members of
       the University faculty who have demonstrated high
       ability and achievement in their dedication to
       growth of human knowledge.

       11
             Because this case does not present facts that are
“substantially the same” as the facts in Ruling 58-301—most
notably, the rights at issue were earned over the course of a long
employment relationship, not at the outset of the relationship—we
are free to consider and afford some deference to the reasoning in
Ruling 2004-110. We need not do so, however, because Ruling
75-44 provides sufficient guidance.

                                  16
       Tenure is intended to assure the University that
       there will be continuity in its experienced faculty
       and in the functions for which they are
       responsible.

       Promotion to tenured rank constitutes recognition
       by the University that a person so identified is
       qualified by achievements and contributions to
       knowledge as to be ranked among the most worthy
       of the members of the faculty engaged in scholarly
       endeavors.

(App. at 193-94) (emphasis added).12 The fact that tenure is
awarded on a very limited, discretionary basis does not change
the fact that it is awarded based on service to the University. In
this regard, we agree with Appoloni that courts

       must not look simply at what is being relinquished
       at the point a severance payment is offered, but
       rather, how the right relinquished was earned.
       Thus, we cannot understate the importance of the
       fact that a teacher earns tenure by successfully

       12
              According to the University’s policy on tenure,
individuals from other universities may “[u]nder exceptional
circumstances” receive an initial appointment as an associate
professor or professor with tenure. See App. at 165 ¶ 4.6(h).
However, it appears that service at another university does not
satisfy the years of service requirement for participation in the
Plans. See App. at 154, ¶ 1-5 (defining years of service, a
requirement for Plan eligibility, as “each Contract Year with tenure
or in the tenure stream at the University of Pittsburgh as completed
by a Faculty Member”) (emphasis added). This limitation on
eligibility also suggests that the payments were based more on past
service to the University than relinquishment of tenure status. See
Associated Electric, 226 F.3d at 1328 (noting that employer’s
“desire to only compensate the employees for service to Associated
and not to the mine, which would have allowed compensation for
service to other employers,” supported characterization of early out
payments as wages).

                                17
       completing a probationary period. In other words,
       a teacher does not obtain tenure at the onset of
       employment; it is a right that is earned like any
       other job benefit. Admittedly, the grant of this
       right is guaranteed and protected by statute. But
       we fail to see how the fact that this right is
       protected by statute takes away from the point that
       it still must be earned through services to the
       employer.

450 F.3d at 192-93 (citations omitted) (emphasis added).13

       In sum, because tenure is a form of compensation for past
services to the University, payments offered as a substitute for
tenure are compensation and therefore taxable as wages. See 26
U.S.C. § 3121(a) (“[W]ages” includes “all remuneration for
employment, including the cash value of all remuneration
(including benefits) paid in any medium other than cash.”);
Appoloni, 450 F.3d at 195 (“Tenure rights were previously paid
in kind—job security—and now are being paid in cash.”); CSX,
52 Fed. Cl. at 221 (“Pursuant to [§ 3121(a)] . . . the value of the
benefits and protections that each employee held in his or her
position—rights to vacation pay, sick pay, layoff pay, and
seniority—constituted part of the employee’s total compensation
package and, hence, constituted wages. Therefore, when these
job-related benefits are relinquished in favor of a lump-sum
payment, the transaction simply amounts to a redemption, paid
in cash, of wage amounts previously paid in kind. . . . [W]hat
were wages at the start remain wages at the end.”).

       13
           In Appoloni, tenure rights were earned automatically,
whereas here, and in North Dakota State, they were awarded at the
University’s discretion. See 450 F.3d at 195 n.5 (quoting North
Dakota State, 255 F.3d at 601). Appoloni distinguished North
Dakota State on this basis, but we do not think this distinction
makes a difference, since it is clear in this case that, discretionary
or not, the employee’s rights were earned as a reward for their
service to the University.

                                 18
      III.   CONCLUSION

       The record in this case shows that payments under the
Plans were primarily in consideration for employees’ past
service to the University. Relinquishment of tenure rights, while
a condition precedent to the payments, was not the primary
consideration that employees offered. The payments therefore
qualify as wages subject to FICA taxation. Accordingly, we will
vacate the District Court’s entry of summary judgment in favor
the University, and remand to the District Court for entry of
summary judgment in favor of the government.

SCIRICA, Chief Judge, dissenting.

        This case presents the question whether retirement payments the
University of Pittsburgh (“University”) made to former tenured faculty
members were “wages” subject to FICA tax. Although the matter is not free
from doubt, I would hold the payments were not wages because they were
given primarily in exchange for the faculty members’ relinquishment of
tenure, which is a property interest in continued employment absent cause or
financial exigency. See North Dakota State Univ. v. United States, 255 F.3d
599 (8th Cir. 2001).
        The problem of defining “wages” in this case presents a contrast
between two possible concepts of faculty tenure at the University. Is tenure,
as the Government contends, analogous to seniority rights and other benefits
earned in the course of employment? Or, as the University argues, does
tenure mark the beginning of a new employment relationship distinct from
prior service? According to the first view, the payments at issue here were
remuneration for employment and were subject to FICA tax. According to the
second view, the payments were not remuneration for employment, because
they were given primarily in exchange for the relinquishment of property
rights the faculty received at the beginning of the tenured relationship. The
District Court, following North Dakota, agreed with the University. The
majority reverses and adopts the Government’s view. I would affirm and
follow North Dakota.
                                         I.
        I would hold the payments made in exchange for the relinquishment of
tenure by the University faculty members were not subject to taxation under
the Federal Insurance Contribution Act (FICA) because they were not
“wages” as that term is defined at 26 U.S.C. § 3121(a).

                                      19
                                       A.
        The Internal Revenue Code requires employers and employees to pay
taxes under FICA on all “wages” an employee receives “with respect to
employment.” 26 U.S.C. § 3101(a)-(b). “Wages” means “all remuneration
for employment, including the cash value of all remuneration (including
benefits) paid in any medium other than cash.” Id. § 3121(a). “Employment”
is “any service, of whatever nature, performed . . . by an employee for the
person employing him.”14 Id. § 3121(b). “Service,” in turn, includes “not
only work actually done but the entire employer-employee relationship for
which compensation is paid to the employee by the employer.” Soc. Sec. Bd.
v. Nierotko, 327 U.S. 358, 365-66 (1946). It is undisputed that the payments
here were taxable income for ordinary income tax purposes. But not every
item of income is wages subject to FICA taxation. See Cent. Ill. Pub. Serv.
Co. v. United States, 435 U.S. 21, 25 (1978) (discussing the definition of
“wages” and noting “many items qualify as income and yet clearly are not
wages”). The question here is whether the payments were remuneration for
employment.
        The Government contends the early retirement payments are wages
because they arise out of the employment relationship and are analogous to
severance payments and payments for relinquishment of accrued seniority
rights, which IRS rulings designate as wages. See Rev. Rul. 74-252, 1974-1
C.B. 287; Rev. Rul. 75-44, 1975-1 C.B. 15. The University argues the
payments are not wages because they were given in exchange for the
professors’ relinquishment of enforceable property rights in tenure, and are
analogous to “buy-outs” of unexpired contract rights – payments that, under
another IRS ruling, are not wages. See Rev. Rul. 58-301, 1958-1 C.B. 23.15
                                       B.

       14
          The statute includes some exceptions, not relevant here,
to the definitions of “wages” and “employment.”
       15
         As the majority notes, in Revenue Ruling 2004-110, 2004-
2 C.B. 960, the IRS modified and superseded Revenue Ruling 58-
301. But Revenue Ruling 2004-110 by its terms does not apply to
payments made before January 12, 2005, in circumstances
substantially the same as in Revenue Ruling 58-301. Since the
payments at issue here occurred between 1996 and 2001, and the
circumstances here are substantially the same as in Revenue Ruling
58-301, I would hold Revenue Ruling 2004-110 is inapplicable to
the payments in this case.

                                      20
        The Fourteenth Amendment’s Due Process Clause protects interests in
property to which a person has a legitimate claim of entitlement. Bd. of
Regents of State Colls. v. Roth, 408 U.S. 564, 577 (1972). Property is not
limited to “actual ownership of real estate, chattels, or money,” id. at 572, and
it includes “interests that a person has already acquired in specific benefits.”
Id. at 576. We have recognized that tenured professors at public universities
hold a property interest in their tenure, so that procedural due process is
necessary when the university seeks to dismiss a tenured professor.
McDaniels v. Flick, 59 F.3d 446, 454 (3d Cir. 1995); San Filippo v.
Bongiovanni, 961 F.2d 1125, 1135 (3d Cir. 1992).
        The payments at issue here were not wages because, as in North
Dakota, they were given in exchange for the relinquishment of property rights
in tenure that were established at the beginning of the tenure relationship
between the faculty members and the University.
                                        II.
        As some courts and commentators have observed,16 defining tenure can
be a vexing task. But the University’s Faculty Policies, which appear in the
record here, provide guidance. The concept of tenure that emerges from the
record more closely resembles a right established at the onset of a new
relationship than the types of benefits at-will employees earn over time. I
would hold payments for relinquishment of the latter type of rights are wages,
but those for the former type are not.
        Two core aspects of the University’s tenure policy distinguish the
tenure right from certain job benefits earned over time that may be viewed as
remuneration for employment.
                                         A.
        First, as in North Dakota, the process by which tenure is awarded at the
University here distinguishes tenure from rights earned through service during
the employment relationship.
        The University’s “tenure stream” is composed of faculty who are
eligible to receive tenure and those who already have tenure. The tenure
stream includes instructors, assistant professors, associate professors, and
professors. Only associate professors and professors can have tenure. A
faculty member without tenure can serve only for a limited time in the tenure

       16
        See, e.g., North Dakota State Univ. v. United States, 84 F.
Supp. 2d 1043, 1050 (D.N.D. 1999), aff’d, 255 F.3d 599 (8th Cir.
2001); Ralph S. Brown & Jordan E. Kurland, Academic Tenure
and Academic Freedom, 53 Law & Contemp. Probs. 325, 325
(1990).

                                       21
stream – usually seven years. At the end of that period, either the faculty
member receives tenure or his or her service in the tenure stream is
terminated. But this “probationary” period is a prerequisite to tenure and is
not analogous to the time period during which employees accrue different
types of seniority rights. The University’s policies show tenure is more than a
recognition of satisfactory work. Rather, the decision to grant or deny tenure
depends on myriad qualitative factors and calls for an evaluation of each
candidate’s capacity for research, teaching, and contributing to knowledge.
Moreover, the University’s policy specifically imposes certain “Non-Merit
Considerations,” such as financial resources, personnel needs,17 and
curriculum demands.18 These latter criteria may depend not on the individual
professor’s role at the University, but on extrinsic forces. Accordingly, the
grant or denial of tenure cannot be viewed strictly as an evaluation of whether
a professor has performed adequately during employment, as is the case with
the accrual of seniority rights in other circumstances.
        As the majority observes, the Sixth Circuit, in Appoloni v. United
States, 450 F.3d 185, 185 (6th Cir. 2006), cert. denied, 127 S. Ct. 1123
(2007), held early retirement payments to retired public school teachers given
in exchange for the teachers’ statutory tenure rights were FICA wages. But I
believe the tenure right at issue in Appoloni is distinguishable from the
university tenure here and in North Dakota.
        In Appoloni, the public school teachers obtained tenure automatically
upon completion of a probationary period. Id. at 194. But here, just as in
North Dakota, tenure is “much more than a recognition for past services,” 255
F.3d at 605, and “is not automatic upon completing service for a specified
time period, which is a hallmark of ordinary seniority rights.” Id. In cases
like Appoloni, the teacher’s past satisfactory work during the probationary
period may be seen as consideration for the tenure award, but not so here
where the tenure decision is marked by such broad discretion and “Non-Merit

       17
          For example, the tenure policy states that in order to
“retain flexibility within the anticipated resources of the
University, the proportion of tenured to non-tenured faculty must
not rise to a level that would impair the University’s or school’s
capacity to respond to changing demands for its services.”
       18
          Relevant factors include “the current standards of the
relevant discipline or profession at large and the requirements of
the candidate’s department or school at the time of the
recommendation and for the then-foreseeable future.”

                                      22
Considerations.” See id. at 606 (rejecting “the government’s underlying
premise that tenure accrues over time and is similar to seniority”).
                                         B.
        Second, the rights of tenure, along with its purposes, show that it marks
a new relationship between professor and university.
        It is undisputed here that tenured faculty at the University can be
terminated only for “cause” or “financial exigency,” and only after a hearing.
According to the University, tenure, once awarded, is “obligatory for the
University, optional with the faculty member.” As we have recognized,
tenure at a public university is a right in “property” that entitles its holder to
procedural due process. San Filippo, 961 F.2d at 1135. The right to
indefinite employment absent cause or financial exigency may carry
substantial economic value even though it is not the type of property that
typically is traded. See Vail v. Bd. of Educ. of Paris Union Sch. Dist. No. 95,
706 F.2d 1435, 1451 (7th Cir. 1983) (Posner, J., dissenting) (“A contract that
gives a teacher the right to be employed till he retires is special, for unless he
is old or rich the present value of his tenure right is probably his biggest
asset.”), aff’d by an equally divided court, 466 U.S. 377 (1984) . By
relinquishing tenure, the faculty members gave up this value.
        Tenure serves several purposes. It gives the University “continuity in
its experienced faculty and in the functions for which they are responsible.” It
helps the University foster “the independence of the mind and the freedom to
inquire.” It “constitutes recognition by the University that a [tenured faculty
member] is qualified by achievements and contributions to knowledge as to be
ranked among the most worthy of the members of the faculty engaged in
scholarly endeavors: research, teaching, professional training, or creative
intellectual activities of other kinds.” And importantly, as the University
notes, tenure serves an instrumental purpose in granting prospective rights
that protect faculty members’ academic freedom.
        For all of these reasons, I agree with the North Dakota court’s
characterization of tenure as establishing a different relationship with the
University, not a mere continuation of service with added benefits. 255 F.3d
at 606. Tenure is the second of “two successive relationships with the
university,” id., and is “a significantly different status – effectively a new
job.” Id. (quoting Mayberry v. Dees, 663 F.2d 502, 516 (4th Cir. 1981)). As
in North Dakota, the property rights faculty members relinquished here were
not accrued through duration of satisfactory employment, but were instead
granted at the beginning of the separate tenured relationship with the
University, a beginning marked by the recognition of superior achievement
and “Non-Merit Considerations.” The payments are more analogous to buy-
outs of unexpired contract rights than to severance payments or payments for

                                       23
the relinquishment of rights of at-will employees. Accordingly, I would hold
payments for the relinquishment of the property right in tenure at the
University were not remuneration for employment and were not subject to
FICA taxation.
                                       III.
        For the foregoing reasons, I would affirm the judgment of the District
Court.

                                      24