UNITED STATES v. CLEVELAND INDIANS BASEBALL CO.
Under a grievance settlement agreement, the Cleveland Indians Baseball Company owed 8 players backpay for wages due in 1986 and 14 players backpay for wages due in 1987. The Company paid all of the back wages in 1994. No award recipient was a Company employee in that year. The Company also paid its share of employment taxes on the back wages according to 1994 tax rates and wage bases. The payments were subject to Social Security and Medicare taxes under the Federal Insurance Contributions Act (FICA) and taxes on wages to fund unemployment benefits under the Federal Unemployment Tax Act (FUTA). Both tax rates and the amount of the wages subject to tax have risen over time. After the Internal Revenue Service denied the Company's claims for a refund of the payments, the Company initiated suit in Federal District Court. The court, bound by precedent, ordered the Government to refund FICA and FUTA taxes. The Court of Appeals affirmed.
Is backpay subject to federal taxes, under the Federal Insurance Contributions Act and the Federal Unemployment Tax Act, based on the year the money should have been paid out?
Legal provision: Internal Revenue Code
No. In a unanimous opinion delivered by Justice Ruth Bader Ginsburg, the Court held that back wages are subject to FICA and FUTA taxes by reference to the year the wages are in fact paid. "Although the regulations, like the statute, do not specifically address backpay, the Internal Revenue Service has consistently interpreted them to require taxation of back wages according to the year the wages are actually paid, regardless of when those wages were earned or should have been paid," wrote Justice Ginsburg for the Court. Justice Antonin Scalia filed an opinion concurring in the judgment.
Argument of James A. Feldman
Chief Justice Rehnquist: We'll hear argument next in Number 00-203, United States v. The Cleveland Indians Baseball Company.
Mr. Feldman: Mr. Chief Justice, and may it please the Court:
The question presented in this case is whether back pay for purposes of the Federal Insurance Contribution Act, known as FICA, and the Federal Unemployment Tax Act, known as FUTA, whether back pay under those statutes is taxed in the amounts applicable to the year in which it was paid, or the year in which it should have been paid.
In our view, the plain language of the statute provides a clear answer to that question.
All five of the statutory provisions that are directly applicable to this case base the tax on, quote, the wages paid during the calendar year, not the wages that should have been paid, or would have been paid, or could have been paid if events had been other than they were.
Justice O'Connor: You know, I have just one big problem with your case, and that is the case from this Court dealing not with the taxability, but with the calculation of benefits under statutes using the very same language, where we look back at the year when it should have been paid in calculating benefits, and your opponent is going to say, and has said in the brief, that it will cause lots of disruption if we were to adopt your view in that area.
Can you have these statutes using the very same language and have a different interpretation for calculating benefits than you do for taxing...
Mr. Feldman: Let me just...
Justice O'Connor: the wages?
Mr. Feldman: I have one caveat before I answer the question, which is, actually the language in nobody's view, I think, is the same.
The statutes that are at issue here were not at issue in Nierotko.
If any particular language was being interpreted in Nierotko, and I'm not sure it was, they talk about...
Justice O'Connor: Well, but they both have language referring to wages paid.
Mr. Feldman: Right, that's true, but they... it's slightly different.
They say calendar quarters in which it was paid, so it is slightly different, even the provision that might have been applicable there, but beyond that, the Court in Nierotko based its decision on the purposes of the Social Security Act in providing security for people as they reach older age and as they retire.
The Court referred to that, and I think construed the particular statutes it had there in terms of the statutory scheme in which it was found, which was a security scheme of that sort.
Justice O'Connor: Okay, but in answer to my question, are you taking the view that we can leave that the way it is and calculate benefits...
Mr. Feldman: Yes.
Justice O'Connor: the way Nierotko suggests and not be disturbed by the fact that it's a different view here?
Mr. Feldman: I actually think that there's no problem at all.
In the first place I'd point out that that's the way it's been... the Internal Revenue Service since the time of Nierotko has taken the position that the wages-paid rule is a statutory test for taxes.
On the other hand, the Social Security Administration has taken the view that at least for statutory back pay, which wouldn't apply to this case, but at least for statutory back pay they will allocate it back, and that's been going on for 60 years, and it hasn't caused an enormous problem.
In fact, it's caused no problem at all.
As far as the specific... I mean, I could go through some of the specific examples of problems that respondents say would be caused in the statute by their view.
For example, there is a... an exclusion from wages for money that's paid to somebody more than six... on disability, for disability more than 6 months after the person... the employee stopped working for the employer.
Well, I don't see any problem that is created by applying the wages paid for taxes to that payment.
In fact, the problem would be created quite the contrary.
Under the wages-paid rule, you look, you count 6 months after the employee stopped working, which is what Congress wanted to do.
Payments made after that date are not taxed.
Payments made before that date are taxed.
Under respondent's view, you'd have to take all the payments that were made after that date and try to figure out whether they should have been paid, should they have been paid earlier or should they have been paid later.
Justice Ginsburg: Don't those records have to be kept for social security allocation purposes, so the employer... to determine quarters of coverage, would have to supply those records to the Social Security Administration.
Mr. Feldman: Well, not quite.
The Social Security... the issue arises, I would say, with less intensity and frequency in Social Security for a number of reasons.
One is that as a Social Security... under the Social Security scheme, they essentially permit you either... your choice, option of either going back or using the wages-paid rule, and therefore a lot of cases, since you have a choice a lot of cases don't even arise, because they just use the wages-paid rule.
Secondly, under the Social Security scheme, because of the way that scheme works, it's a lot less significant, the allocation decision.
Under Social Security, all you need is 40 quarters of coverage in order to be a fully-insured individual, and most people already have that, and it doesn't really matter whether it's in the quarter that it would be paid or the quarter, or some other quarter it's allocated to.
In addition, under the Social Security scheme, your benefits are based essentially on your average annual earnings.
That's the way they're currently calculated.
It's just an average annual earnings.
It doesn't really matter where you allocate the wages, it won't make much difference for most people's Social Security, because you're taking an average anyhow over some many-year period of time, usually.
Now, I'm not saying it will never make a difference, but the issue arises much less sharply and with much less frequency in the Social Security context, but in any event...
Justice Ginsburg: But my question really is, are you taking a position that the provisions, the FICA and FUTA, however you pronounce it, that those provisions dictate the position that the Government is taking, or are you saying, yeah, they could have gone for symmetry with Nierotko, but this statute could go either way, and our consistent interpretation, the service's consistent interpretation has been when it's paid is when it's income?
Mr. Feldman: No, I think the wages-paid language in FICA and FUTI... FUTA is entirely unambiguous.
It says, wages paid during the particular year, and I think that that ends the question as far as FICA and FUTA goes.
The Court in Nierotko adopted a different construction of somewhat different language in the Social Security Act.
I think the fairest reading of Nierotko is probably that the Court felt that this was not... didn't tie it to any particular... the allocation question... didbn't tie to any particular language, but just decided that an exception of this sort was necessary to accomplish the purposes of the Social Security Act.
Justice Kennedy: Do you think Nierotko was wrongly decided?
You don't ask us to change it.
Mr. Feldman: No, we don't.
It was a statutory decision, and I don't think that there's any basis to overrule it.
I think that they... the Court didn't give any explanation of how it arrived at the conclusion that you have to allocate back based on any particular language of the statute, and that's one reason why I think the best reading of Nierotko is that the Court was just adopting a kind of extrastatutory exception, and saying, given the purposes of the Social Security Act and providing security for people so that they'll know they'll get the funds and won't descend into poverty as they get older, given those purposes, this is really the only way to do it for those purposes.
The Court did not look at the specific language of the statutes here, or the specific changes that those statutes had gone through to arrive at that language.
Originally in 1935, in the 1935 Act, the FICA, what became FICA and FUTA... it was actually all part of the Social Security Act... those taxes were based on wages paid for employment during a year.
That meant, and everybody agreed at that time, you had to look at when the employment occurred, not when the wages were paid.
That scheme was in effect for a few years and the 1939 Congress saw that it caused confusion and difficulties and said, we have to change this, because we don't want to have to... it's easy to figure out when somebody was paid.
Indeed, in this case they stipulated that they were paid in March of 1994 and usually that's a question that doesn't cause any problem, so we're going to base the taxes in 1939 on the wages paid.
Now, in 1946, Congress extended that to the wage-base provision, so by 1946 everything was in line to avoid the kind of confusions and uncertainty that were caused by having to look and see when the employment was performed.
Justice Souter: But none of the statutory changes address this point specifically.
Mr. Feldman: I think, quite to the contrary, I think they do.
I think changing... because I think changes to wages paid was an unambiguous change that required that the tax be based on whether...
Justice Souter: It is certainly unambiguous with respect to the normal payment of wages in accordance with whatever the wage contract is, but if we take the position, and I will confess that I... I'm inclined to, and that's what I want you to address.
If we take the position that the statute simply does not address the problem that we've got here... it addressed the problem of accrual versus cash methods when you're doing your taxing in the normal course, but it doesn't address the, in effect the back-wage problem, if we take that position, why isn't it sensible for us to say the normal, bedrock philosophy of remedial orders is to put the wronged party in the position that the wronged party would have been in if, in fact, the defendant has acted as the defendant should have, and if we take that position, then we're going to, in effect, find the wages payable for these various tax purposes when they should have been paid.
Mr. Feldman: I don't think that that's the... that is the philosophy when you have litigation between the wrongdoer and the wronged party.
I don't think that that's a part of the philosophy of the tax code.
The Government is not the wrong... the party that committed any wrong in this case or in any of the other cases...
Justice Kennedy: Right.
Justice Souter: The Government is a neutral party so far as that's concerned.
Mr. Feldman: this question...
Justice Souter: But why should a neutral party, in effect, have a... in effect a different rule for its taxation from the rule which in effect determines the relationships of the two parties to the litigation?
Why should we have disparate rules?
Mr. Feldman: Because we know... because what Congress was looking for was an administrable rule to apply for the tax system here.
Justice Scalia: Well...
Mr. Feldman: Under respondent's rule...
Justice Souter: But what is... I... we don't have the same problem of administration when we look back with back pay and say when it should have... when should it have been paid that we have when Congress was addressing the problem in 1939, which was an accrual kind of problem in which the taxes are due on wages before the wages are actually paid.
I mean, those are entirely different administrative problems.
I guess I don't really see what the administrative problem is in the back pay context.
Mr. Feldman: Well, I think the administrative problem is that under the should-have-been-paid rule that respondent advocates there's two distinct areas of controversy that don't arise under the wages-paid rule that's in the statute.
First, in our society people are ordinarily paid for services performed during a certain period, so in order to figure out when wages should be paid, you have to figure out when the services were performed, or for what period they're being paid.
That's exactly the inquiry that was required under the 1935 statute...
Justice Souter: Yes, but the...
Mr. Feldman: and that would be reinstituted under this statute.
Justice Souter: Take this case.
Take this case.
What is the problem in this case?
These people weren't being paid for doing piecework.
They were being paid a salary under a contract which, at least so far as the briefs indicated, would call for regular wage payments, so I don't see any administrative problem in applying the respondent's rule in this case.
Mr. Feldman: Well, in every case, there may not be a problem in every case, although I would add, I'm not sure in this case whether it's been developed when the wages should have been paid.
It hasn't been stipulated to...
Justice Souter: Well, do you have any reason to believe it would be difficult to develop that?
Mr. Feldman: I don't know what kinds of arrangements they had, but some times employers pay things early, sometimes they pay late.
There are many, many kinds of employment in this country.
There's casual and part-time workers, there's commissioned workers, royalty-based workers, there's employers who decide to pay early against a later commission.
In all of those cases, what you'd have to do is look back and say, when was the work performed, and when should have been in the ordinary course the wages paid, and it offers an opportunity...
Justice Souter: But isn't that...
Mr. Feldman: a further opportunity...
Justice Souter: But isn't that what is determined in effect in the contract actions that result in the judgments of back pay?
In other words, don't... at the time, as it were, the parties in the Government confront the problem that you raise, haven't they in the normal course already confronted that problem in the lawsuit which results in the back-pay award?
Mr. Feldman: I don't think that that's necessarily so.
I mean, I think one question that frequently, especially when cases are settled, and are not resolved by a final judgment, one question that nobody has to decide is when should the services... when were the services performed, and when the money should have been paid.
You're just paying somebody some money.
You can tell the date that the money was paid.
It's very easy.
But there's numerous opportunities for, both for collusion between parties to say that it should have been paid on whatever date is going to work out best for them.
There's opportunities for disputes between employers and employees about when the work was performed, when the wages should have been paid for that work, because they... employers and employees may themselves have different interests.
There's the same... it's the same confusion and difficulty that Congress wanted to move away from.
Justice Ginsburg: On the income tax side, the back-pay award itself...
Mr. Feldman: Yes.
Justice Ginsburg: Back pay was attributable to '86, '87, but it's paid in '94.
For income tax purposes, nowadays it's '94 income, is that right?
Mr. Feldman: That's correct.
For almost all... at least on the individual side, for almost all individual taxpayers they pay on a cash basis, and...
Justice Kennedy: Well, what about for the employer's deduction, I wanted to ask.
Mr. Feldman: You know, for the employer's deduction, it's not in the record here, and I'm not sure on what basis the employer is working, but since the employers and employees have to be on the same year, it really makes sense to look at the individuals, because we do know that the individuals' taxes are going to be on a cash basis.
Justice Kennedy: I take it the employer gets a deduction for the FICA and the FUTA.
Mr. Feldman: Yes, that's correct.
That's correct, and keeping this... keeping the FICA and FUTA taxes on the same basis as the income tax also avoids some further confusion in these schemes.
When Congress enacted the FICA and FUTA schemes, and when they changed it in 1939 and 1946, these schemes were supposed to be simple and easy to administer.
It actually, it follows, in fact, a fortiori from the fact that individuals do this under the income tax and nobody disputed that so far, that it should be treated the same way under FICA and FUTA.
Those taxes apply usually to almost all wages.
There's a few... there are some exceptions, but very few people actually come within them.
Justice Kennedy: It seems to me we have three arguments.
We have the plain language of the statute, as to which you have the slight edge.
You have thee Nierotko, which obviously the respondents do, and in the middle ground you have the ease of administration, and I can't quite tell from the briefs, I think there's something to be said on each side for that.
Mr. Feldman: Well, I don't really see anything to be said, frankly, on the other side for ease of administration.
They argue that there are a bunch of statutory... there are a bunch of statutory provisions defining wages and so on that would be... would come up with results that they say Congress wouldn't have wanted, but all of those provisions are precisely-worded provisions that tie something to payments made during a certain period of time, and Congress advisedly, I think, in adopting those provisions, they didn't say, well, the employer... they're not wages, if the employer was really just giving a gratuitous payment, and so you have to look and see whether it was a gratuitous payment.
They said, 6 months after the employee ceased working, if it comes after, more than 6 months it's not taxed, if it's less than 6 months it is taxed.
Their... and really that's very consistent with the whole FICA and FUTA schemes, where these taxes are not generally as high as the income tax, and the FUTA tax is rather low.
The whole scheme was, you apply it from dollar number 1.
You try to have a simple rule that's easily administrable.
Justice Kennedy: Mr. Feldman...
What happens, say, if it's a small employer, and he's just late on paying the wage?
He pays it in January instead of December.
What's the standard rule for allocating?
Do you just...
Mr. Feldman: You look at the time it was paid, it says in the regulations.
It say when it was actually paid.
The only exception is constructive payment, which comes in very few cases, and that's where it's actually available to the employee but the employee didn't pick up the check or something.
Justice Stevens: Mr. Feldman, can I just ask, you may have covered this, but in the red brief, toward the end of the brief, there were a lot of anomalous examples.
If you follow one rule for benefit purposes, another rule for tax purposes, you get a bunch of anomalies they suggest, and your response to all of that is, as I understand it, that's been true for 40 or 50 years, and it really isn't all that serious.
Is that your answer?
Mr. Feldman: I think, two answers.
One is it has been true for 40 or 50 years, and it hasn't caused any major problems, but second is, I just don't think that there are anomalies, the anomalies would be created.
Let me take another example.
There's the example of a case where payments that are made to the estate of someone who's deceased in the year after they died, are not taxed under FICA and FUTA, but if the payment is made during the year... in the same year that they died, they are taxed under FICA and FUTA.
That provides a bright line.
It's easy to administer.
You go, you look, you see when the payment was made, and you decide whether you have to pay the FICA and FUTA taxes, which is very consistent with how Congress wanted this scheme to work.
Under respondent's scheme, you have to look at all the payments that were made after the year that the person died and try to see, well, was there some reason why they really should have been made earlier, were they late, were they delayed, did the employer not make the payment on time, was there a dispute, whatever, and you have to sort all that out.
I think under the logic of respondent's position, which is, you're trying to put people, the Federal Government in the FICA and FUTA system is trying to put people in the same position they would have been if the taxes had been paid when they should have been, you have exactly the reverse problem, too.
All the payments that were made during the year that the person died, you have to look, well, were those advance payments, should they really have been made in the next year, why shouldn't they be made in the next year, then they're not taxable, and I don't really see any way to distinguish between any of those cases.
I think Congress enacted a precisely drawn statute here with carefully drawn provisions that drew sharp lines and were easy to administer, and the wages-paid rule is the classic example of that, because it's... there's very few disputes about when wages are actually paid, and if it's applied in accordance with its terms, then the result is that you were able to do it, and I don't think any...
Justice Stevens: Of course, their position only applies to back-pay awards, which usually are... you do determine the period when the wages should have been paid in that kind of a context.
It's not just like the year-end bonus, or something like that.
Mr. Feldman: Well, back pay covers... may cover a lot of different situations.
I mean, I guess back pay, as I understand the way they would use the word, which is not the way Social Security Administration views it, is any time when somebody doesn't get... gets paid later than when they should have been, which it could be due to someone's fault, it could be due to no one's fault, and it could be just a brief delay, it could be a long delay, and when those cases are then... a dispute does arise, a significant dispute, and you come to settlement, the parties can just then characterize whenever the wages were paid, if they could agree on that, and the IRS would have a very difficult time disputing any of that, whereas...
Justice Scalia: It could be part of the settlement deal.
You know, you say this date, and I'll settle for a little less.
Mr. Feldman: Right, and that's exactly the problem, and in our view what Congress did was, enacted a wages-paid rule, and they... although... and they were, in 1939 and then when they completed the job in 1946, directly addressing the need to avoid the kind of confusion and uncertainty and opportunity for manipulation that might arise under a should-have-been-paid rule.
The... I would add that the provisions at issue in Nierotko at most... the Court in Nierotko did not discuss or cite any of the tax provisions at issue here.
At the very most, they referred to section 209(g) of the 1939 Act, which had slightly different language from the tax provisions that are in issue here, although I wouldn't make a big deal out of that.
It talked about quarters in which wages were paid, rather than wages paid during a year, but it had slightly different language, and I think the Court's whole approach in Nierotko was driven by its impression of the purposes, the need for security in an old age security system, which is what the Social Security system was.
It would be anomalous to take that approach, that was driven by the purposes of that system and was, insofar as the Court was looking at language at all was driven by language of different provisions that are in a context that's talking about benefits determinations and who's a fully-qualified individual, and apply it to the statutes that are at issue here, which talk about rates of taxation, and are quite clear in speaking in terms of wages paid during a particular year.
I'd just... finally I'd add that the Treasury Department by regulation has for a very long time, since the time of Nierotko, and in fact even before that, looking at some of the wages, the rate provisions of the 19... when they were changed in 1939 has had a wages-paid rule.
It's firmly adhered to that position.
The Treasury regulations give examples of, right in the regulations of cases where some one is paid one year for services in the prior year, and they say no, you go, you look at when the wages were paid, and that answers all questions.
It doesn't say, you then look and see well, when should they really have been paid, or why were they paid late, or should they have been paid later than they were, or any of those questions that could arise.
The IRS, the Treasury regulations also speak specifically in terms of wages actually paid.
That's the basis of the statute.
I don't think that could be clearer, although I think actually the language of the statute is equally clear and consistent with that.
Justice Scalia: Have we given deference to those regs in the past?
Mr. Feldman: The Treasury regulations, the Court has always given deference to Treasury regulations construing the tax code, and these are formal regulations that are in CFR.
Now, in addition, they've been... those regulations have consistently been applied in a series of revenue rulings, including one in 1989, that specifically applied those regulations to this kind of a case, to a back-pay case, and said the wages-paid rule is the one that applied.
That... the Court has generally given deference to revenue rulings.
In the Correll case the Court said that those rulings are entitled to deference, especially in a case like this, where the revenue ruling is a direct interpretation of the Treasury regulation.
Justice Ginsburg: Any distinction between the extent of deference to the Treasury regulations and the revenue ruling, or is it the same?
Mr. Feldman: I think it's the same.
The... I mean, there's a long story that's actually in our brief about the history of revenue rulings.
Before 1961 they were not, did not have precedential value, even within the Treasury Department, and therefore there was no reason to give them deference, and they weren't accorded deference, and there's a couple of decisions of this Court saying that they don't get it.
After 1961, authority to issue those regulations, which had been vested in the Secretary of the Treasury, was delegated to the head of the IRS, and since that time... and then this Court in the Correll case, dealing with one of the... with some of those revenue rulings that came up at that stage said yes, we give deference to the IRS revenue rulings because they're the masters of the subject.
They have to deal with the... deal with these kinds of problems on a daily basis.
Justice Souter: But it didn't say we give them the same deference that we give a regulation?
Mr. Feldman: It was a... Correll was a pre-Chevron case, and so they didn't talk specifically in the language of Chevron, but given the history of the delegation by the Secretary of Treasury to the head of the IRS, I don't see why they wouldn't get the same deference.
The IRS, when they publish revenue rulings, says these don't have the full breadth of scope, because they generally deal with just a narrow issue, and they don't intend that they apply broadly to items beyond specifically the problem that they're addressing, but within that scope, they should get exactly the same deference.
But in any event, our position is consistent with, and really is... our position is the position that's been in the Treasury Department regulations since 19... the early 1940's, and if there were any doubt about what these provisions mean, those regulations should be given effect...
Justice Scalia: Treasury regs adopted by... how, notice and comment rulemaking?
Mr. Feldman: Yes, I'm almost certain.
I mean, these regulations go back way, way far.
Justice Scalia: Well, if it's the early 1940's, it's before the Administrative Procedure Act, and they probably weren't adopted by notice of...
Mr. Feldman: Right, but they've been repromulgated since, and I'm certain... I haven't looked at the Federal Register, but I'm certain they were adopted that way.
Argument of Carter G. Phillips
Chief Justice Rehnquist: Thank you, Mr.... you're reserving, Mr. Feldman?
Mr. Phillips: Thank you, Mr. Chief Justice, and may it please the Court:
I'd like to essentially focus on three basic points, what the Court held in Nierotko, the importance of the 1946 amendments to the Social Security Act on both the benefits and the tax side, and then finally try to discuss and balance the relative positions with respect to the administrative convenience or inconvenience of the various positions taken here today.
With respect to Nierotko, I think I understand the United States to have finally conceded that the pivotal language in the Nierotko decision is the wages-paid language, and that there is no meaningful distinction between the wages-paid language that was the basis for the interpretation in that case and the wages-paid language that we have inherited now that is the subject of the provisions that are at issue in this particular case.
But to the extent that there is any question on that, I would ask the Court to recognize first of all it's clear that the Court was interpreting the 1939 amendments, which contains that language.
The first paragraph of the opinion refers to quarters of coverage, which was a concept that did not exist prior to 1939, so it clearly had '39 in mind at that point.
And then if you look at the penultimate and the ultimate paragraph of the Supreme Court... of this Court's opinions, it also discusses quite specifically that... the provision that's at stake here and it says, you know, the petitioner argues, to put it into context, the amendments of 1939 use quarters as the basis for eligibility as well as the measure of benefits, and require wages to be paid in certain quarters, and this Court then, in rejecting essentially that argument said, we have no doubt that it, referring to back pay, should be allocated to the periods when the regular wages were not paid as usual.
I think there's no other way to interpret Nierotko except for saying that language of wages paid in the benefits context, certainly, means that you allocate it back to when those wages should have been paid under the... under that particular scheme.
It's a special rule for back pay.
Obviously, it doesn't deal with the general accrual problems.
It doesn't resurrect any of the accrual problems.
It doesn't ask you to try to make those kinds of decisions.
It asks you to say, when would they have been paid if the employer...
Chief Justice Rehnquist: And it's dealing, Mr. Phillips, with the receipt of benefits by a... it was a beneficiary suing.
Mr. Phillips: That's correct.
Chief Justice Rehnquist: It wasn't a tax case at all.
Mr. Phillips: Right, it was a benefits case, Mr. Chief Justice, which is why it then becomes pivotal to turn to 1946.
Justice Kennedy: Well, just on this point...
Mr. Phillips: Yes, Your Honor.
Justice Kennedy: in other words, the concept of back pay is different here than if the employer is just late?
Mr. Phillips: Yes, I think that's correct.
I mean, it might turn out if the employer...
Justice Stevens: And we get...
Mr. Phillips: is late and there's some fault attributed to it, that might be a different issue, but if he just paid at a different time and there's no issue about it, it's not back pay within the meaning of the Federal scheme, so you know...
Justice Scalia: So we...
Mr. Phillips: and obviously, a dispute as to whether this was back pay for purposes of this rule.
Justice Kennedy: So we look to Nierotko to determine the origins of this phrase, of this concept of back pay, or...
Mr. Phillips: Well, there is...
Justice Kennedy: it depends on litigation, or...
Mr. Phillips: Right.
There are regulations that define back pay, and do it in terms of payments that would have been made by the employer, you know, but for the employer's wrongdoing, but I don't... and I don't understand the Government to either, at any point in this litigation to have raised any question as to whether this is fairly describable as back pay.
As I understand the question they've asked the Court to decide is, assuming it's back pay, what's the appropriate allocation rule for that kind of an approach.
Justice Kennedy: Why, if I pay in January for something I should have paid in December because I'm just late, why isn't that back pay?
Mr. Phillips: It may well be back pay, depending on the circumstances.
If the reason I didn't pay is because I've breached the contract, and I have an obligation to pay it under those circumstances, it might well be back pay under those circumstances.
Justice Kennedy: I'm just late.
I'm... my bank account was too small to cut...
Mr. Phillips: I'm sorry?
Justice Kennedy: We just didn't have the money.
Mr. Phillips: Right.
I mean... but I mean, I don't think you're entitled to hold off paying because you don't have the money.
Justice Kennedy: I understand that, but my understanding of the Government tells me that in that case it is attributable to the month in which it was paid, and I'm trying to find out what...
Mr. Phillips: Yes.
Justice Kennedy: how employers are going to tell the difference if we hold for you.
Mr. Phillips: Right.
Well, the back-pay definition in the regulations is, pay received in one period of time which would have been paid in a prior period of time except for a wrongful or improper action taken by an employer, under that circumstance I suspect that would fall within back pay, as the Federal Government itself deals with it, but...
Justice O'Connor: And for income tax purposes of the employees, it would be... we're talking back pay.
It would be the year received?
Mr. Phillips: It is in the year received, as it turns out today, but recall, Justice O'Connor, back when this was all enacted in both 1939 and 1946 it would not have been paid under those circumstances.
There was a whole different regime with respect to income taxes that existed at that time, and against which Congress was acting with respect to the taxing part and the benefits part of the Social Security Act.
Justice Kennedy: Well, but under your view, any late pay is wrongful, if it was due.
Mr. Phillips: Well, it might be.
I don't have a view on that actually, Justice Kennedy.
All I'm doing is reading the reg and saying that they attribute to... you know, the question is whether it's wrongful.
There may be issues...
Justice Scalia: It isn't just wrongful.
It says improper.
Mr. Phillips: Right, and...
Justice Scalia: Wrongful or improper...
Mr. Phillips: And my guess is there would be a basis for which you could make a claim of back pay, but that's obviously not what Congress was concerned about when it modified the rule to make it simpler.
Justice Breyer: Yes...
Mr. Phillips: It was dealing with the traditional accrual problem of payments that you expect in the ordinary course to be paid at times that are different from when the services arise, and then what do you do in that situation, which is a pretty common problem.
It's one I face every year.
Justice Breyer: Well, but the point would be that the Congress did want to make it simpler.
Mr. Phillips: I'm sorry?
Justice Breyer: Congress did change this because it wanted to make it simple for people.
Mr. Phillips: Absolutely, Justice Breyer.
Justice Breyer: And making it simple for people you just look to the... the quarter or the year in which the money was received, and that's when the tax is due.
Now, if we adopt your position, I think I would agree with Justice Kennedy's implication.
Suddenly, it's not going to be so simple any more, and it isn't just an allocation question, it's also a question of what is it you allocate, and sometimes you're going to allocate these payments, and sometimes you won't allocate the payments.
It sounds like a mess.
Mr. Phillips: Well...
Justice Kennedy: That's the...
Mr. Phillips: You know, the Court addressed exactly the same quote, mess, in Nierotko itself.
Justice Breyer: No, they thought... Nierotko was very simple, really.
It was just a question of whether or not people are covered for Social Security purposes.
Mr. Phillips: But it addressed...
Justice Breyer: It would be terrible if you said they're not covered for Social Security purposes simply because the employer never paid them their wages and they got it all in one lump sum after they were 50 years old.
That would be terrible.
Mr. Phillips: Right, but...
Justice Scalia: So of course you allocate it back.
Mr. Phillips: But Justice Breyer, the point is, is that there are still the same accounting questions that will arise under that scheme, that will arise under our interpretation today, and this Court... and the Government argued, don't go that route, because there will be accounting problems.
Justice Breyer: Assuming that they are the same.
Assuming they're the same.
I'm not positive, but I'll assume that, all right...
Mr. Phillips: Well, they are very, very similar, Justice Breyer.
Justice Souter: Okay.
Chief Justice Rehnquist: All right.
Justice Kennedy: Assuming they are the same...
Mr. Phillips: And the Court dismissed those as not insuperable.
Justice Breyer: All right.
What about the other difference implicit in what I asked?
Obviously, where you have a Social Security statute, and people are supposed to be covered, you're going to make a big effort to allocate this backwards, because if you didn't, it would mean that the statute wouldn't serve its basic purpose.
Mr. Phillips: Right.
Justice Breyer: Here, however, what we have is not only a desire for administrative simplicity, but we also have, who knows where the chips will fall?
I mean, let them fall where they may.
Sometimes some employees will be helped, sometimes others will be hurt, sometimes... you know, who knows, and therefore you don't have this overriding statutory goal to get the backwards allocation.
Mr. Phillips: There are two answers to that.
One is, in the 1946 amendments, Congress was very clear when it said, what we want here is conformity on the benefits side and on the tax side, and therefore the ultimate question about administrative convenience isn't the answer.
What Congress wanted was for the two schemes to be the same, so to the extent that the benefits tends to take you back in time, as I think the Government has conceded today it continues to do, in order to comply or to further the overall objective of Congress in 1946, you have to do the same thing on the tax side, otherwise conformity is completely impossible to achieve, and that's the overriding congressional purpose, it seems to me.
Justice Breyer: Who cares?
What's so important about having the coverage question of what quarters are covered for beneficiaries and the tax question of where you pay the FICAs, who cares whether they conform or not?
Why does it matter?
Mr. Phillips: Well...
Justice Breyer: The three examples you came up with, their response to that is, each of them involves, if you're right, the Government collecting less money, and we don't care.
Mr. Phillips: Well, I mean, there are two answers to that.
One is the overall purpose of the Court's mission here is presumably to implement Congress' intent, and if Congress says to you, by adopting exactly the same words for two separate provisions that deal with two different schemes...
Justice Scalia: May I ask you a question on that?
Mr. Phillips: then it seems to me the answer is, adopt Congress'... and tells you we want conformity between the two...
Justice Stevens: Mr. Phillips...
Mr. Phillips: then the only... I'm sorry, Justice...
Justice Stevens: Let's assume Congress said that and meant that completely.
Is it... is Mr. Feldman correct in telling us that despite that clear statement from Congress, for the last 50 years they've been doing just the opposite, and following one rule for benefits and another rule for taxes?
Mr. Phillips: Yes.
For the last 50 years the Social Security Administration...
Justice Stevens: So at least we are... what is called into question is a uniform, consistently followed practice for five or six decades.
Mr. Phillips: Yes, on both sides, though.
Remember, Social Security Administration...
Justice Kennedy: I understand.
Mr. Phillips: has had an equally uniform rule that it has applied since the very day Nierotko was decided, and when the 1946 amendments went into place, and if you look at the lodging that we filed that identifies...
Justice Scalia: No...
Mr. Phillips: a description of this analysis by the Social Security Administration, from day one they said, the Court said in Nierotko, for back pay you have to allocate it back, and that's the way we're going to apply it, and that sort of makes the...
Justice Ginsburg: You disagree with the... Mr. Feldman told us that on the benefits side of the allocation it was really up to the wage-earner, could do it either way.
I can't imagine why... well, in my... in... I think he told us first of all in most cases it means nothing at all.
Mr. Phillips: Right, but that's clearly wrong, because when you're dealing... I mean, it may be one thing for quarters of coverage, which is what he identified, but when you're talking about the maximum benefits of $50,000, and you're talking about incomes that well exceed that, how you treat that money is a big, big difference in terms of how it applies out in a particular situation.
Justice Ginsburg: But there's... if you would create a symmetry between benefits and the tax, you would be creating an asymmetry between the income taxation of the back pay and the taxes that go with that...
Mr. Phillips: But that's an asymmetry that has existed for all time.
There's never been consistency between income taxes and Social Security taxes.
What I'm trying to do is say, when you talk about, quote, Social Security taxes, which defines what kinds of benefits you're going to get and whether you're entitled to benefits in any event, as opposed to Social Security taxes as to how much has to be contributed by the employer, that it ought to be the same.
It should not be that John Butcher, for instance...
Justice Ginsburg: Well, I... in the case of Social Security and that allocation, the employee benefits every time by doing it the way Nierotko... the employee can only be helped.
On the other side, sometimes the employees are helped...
Mr. Phillips: Well...
Justice Ginsburg: sometimes they're not.
Mr. Phillips: Well, I don't know that they'll always be helped.
There are certainly certain circumstances where... it depends on how much income they had, under what... at what point in time.
Justice Ginsburg: But then Mr. Feldman tells us they have an option, if it wouldn't work out for them, to spread it back over...
Mr. Phillips: Well, I don't read Nierotko as having given them that option.
I read Nierotko as saying that, you know, you must allocate back.
That's the answer for back pay, in order to do it.
But you know, if there's some mechanism in there for waiving their rights, I suppose that may be true, but I don't think you can analyze the same language in the same statute adopted at the same time with a command that the two ought to be in conformity to each other, and then interpret them as allowing fundamentally different approaches, and that goes to the core of the question of administrative ease.
Let's be clear about this, there is an entire set of accounting rules for Social Security that exist today, and a complete set of accounting rules that apply under the IRS, and as I understand the Government's position, Social Security is absolutely right in its interpretation of what's required here, so if you're going to have consistency in this approach, the only way you can have consistency is by moving the IRS over to the Social Security side.
Chief Justice Rehnquist: Well, what language, Mr. Phillips, precisely is it in the 1946 amendments that you say insists that there be symmetry?
Mr. Phillips: The Senate report that we...
Chief Justice Rehnquist: I mean the language in the Act itself.
Mr. Phillips: Oh, well, the language in the Act is wages paid.
It's exactly identical in both the Social Security benefits language and the Social Security... excuse me, under the tax provision itself.
Wages paid is the operative language and, as I understand the Government today, they concede that's the key term that we're focusing on, and that language was used, you know, with the express statement in the legislative history, that it was done for conformity, which just reinforces what I think common sense would tell us.
Chief Justice Rehnquist: Is that... is the Senate report cited in your brief?
Mr. Phillips: Yes, Justice... Mr. Chief Justice.
Justice Scalia: Well, I can find it.
Mr. Phillips: It's on page 21 of our brief.
Chief Justice Rehnquist: Thank you.
Mr. Phillips: It seems to me that...
Justice Scalia: Apparently the Internal Revenue Service didn't read that, or didn't think that everybody paid attention to it, or what?
Chief Justice Rehnquist: I...
Mr. Phillips: Well, I hesitate to speculate about what the Internal Revenue Service's motive was here, other than... I do think it's important to put in context, remember, the Internal Revenue... the Government's position here is, this doesn't promote fairness, this doesn't promote revenue enhancement.
The sole purpose that they try to promote is some notion of administrative simplicity, and so they have a somewhat simpler method of dealing with it.
It just happens to do violence to core notions of statutory interpretation, creates two different schemes of accounting that every employer and employee has to deal with, and creates the kinds of disruptions in the scheme that we spent some time talking about under the exceptions under the Social Security...
Justice Scalia: If you want to talk about violence to the statute, Nierotko, it seems to me, does a fair amount of violence to the statute, and I suppose the question is whether you're going to... whether it's worse to extend that violence to both half of... both halves of the statute, or to leave Nierotko where it is as a case that, where a hard case made bad law, taking the word paid not to mean paid in order to prevent Social Security recipients from being read out of the system.
I'm frankly attracted to the latter approach.
Mr. Phillips: And that would... and that might be a colorable argument but for the fact that Congress, before the ink was dried on Nierotko, looked at exactly that language, adopted exactly that language, and engrafted it into the statute on a going-forward basis, and so the notion that the Court might revisit Nierotko, you know, today... I mean, 1) the Government doesn't ask you to, and 2) it doesn't make sense to do that, and second, I don't even understand the Government to be asking you to reconsider it on the benefits side.
What it says is, you can have a tax rule that goes in one direction, a benefits rule that goes in another direction, when the language is exactly identical.
Justice Stevens: Mr. Phillips, this dichotomy that's gone on since 1946, has anybody in Congress tried to straighten this out, do you know?
Has there ever been any motion to clarify this terrible inconsistency?
Mr. Phillips: Well, you know, it's an interesting question, because both sides of the... you know, the Federal Government is obviously of two minds on this score.
I'm not sure who would have generated enough momentum in order to try to get it changed under those circumstances, so as far as I know there haven't been any legislative efforts.
Justice Stevens: Does the general policy that underlies their doctrine of stare decisis have any bearing on what we should do with this case, do you think?
Mr. Phillips: Well, I would hope that the Court would rigorously enforce the ruling in Nierotko and... but beyond that, I think you get more mileage in this particular context, because Congress in 1946 ratified Nierotko and implemented it on a going-forward basis, so, I mean, I don't think there's a... I don't understand the Government to be arguing that we ought to revisit Nierotko at this particular...
Justice Breyer: Will you make a... like a quick summary... I'm asking you repeat yourself, in a sense, but I... Nierotko's a famous case, and Nierotko...
Mr. Phillips: I don't think I appreciated that till today.
Justice Breyer: Yes... but no, it's the other part.
It's a famous case.
It says that... Nierotko is about back pay being covered by the Social Security Act and, more importantly, the Court says that even though the administrators think it shouldn't fall within it...
Mr. Phillips: Right.
Justice Breyer: Congress wanted to, so it's opposite Chevron.
Mr. Phillips: Predated Chevron, too.
Justice Breyer: It's always been interesting for that reason, so I just thought, well, gee, that's what this case is about.
They're saying this word, you know, this word wages here, covers back pay.
Now, once they make that decision, they sweep away the little subsidiary argument which is that it couldn't mean that because otherwise you'd have to allocate, and they say, oh, no, go allocate.
So I think of it, where Congress said that wages include back pay, you allocate, and now I think, this isn't that, and Congress didn't even say that.
Congress wasn't talking about taxes.
The Court never thought Congress was talking about taxes.
They weren't talking about some general allocation rule.
They were talking about the allocation of the back pay which counts as wages for purposes of the Social Security Act.
You see why I kept thinking it was different?
Mr. Phillips: Sure.
Justice Breyer: And you're going to tell me no, it's not different.
Mr. Phillips: Because of the 1946 amendments, and for exactly the reason you identified.
Nierotko is a famous case.
Congress, seven months after the 1946 famous Nierotko decision...
comes back to this same tax-benefits position, uses exactly that language.
What could Congress have meant?
It clearly didn't mean to overrule Nierotko on the benefits side, and it says it wants the tax side to conform to it.
So in 1946, Congress told us the right answer, and hopefully, 55 years, this Court will tell the IRS that's the right answer, get in line with the Social Security Administration, and affirm the judgment below.
If they need a change, let them take it to Congress.
If there are no other questions, I'll...
Rebuttal of James A. Feldman
Chief Justice Rehnquist: Thank you, Mr. Phillips.
Mr. Feldman, you have 4 minutes remaining.
Mr. Feldman: I just have a couple of brief points.
Justice Kennedy: Do you agree that it's a famous case?
Mr. Phillips: [Laughter]
Mr. Feldman: It is for me now, moderately.
I think one of the points actually I wanted to make is that, to look carefully at what happened in 1946.
This Court decided Nierotko.
There's not a trace of any indication in the legislative history of the 1946 amendments that Congress had any idea that Nierotko had been decided.
They certainly did not say, we are trying to conform anything to Nierotko, so that's the first point.
The second point is, what they did do there is, they also did not change the specific provision that was at issue in Nierotko, which was a benefits provision.
It was a definition of who is a fully qualified individual.
They didn't change that at all, and so they didn't discuss it.
What they did change was the tax provision for the wage base, and that provision they changed to move it to the wages-paid rule, which they had started to bring in in 1939, and they had said why they did that, to avoid the confusion and difficulties that the other rule had caused.
Finally, then, they changed the wage base in the Social Security Act, which was not at issue in Nierotko, because that had nothing to do with wage bases.
It had to do with who was a fully qualified... they changed that, and they said, well, we're doing this just to conform with what we've done with the tax provisions.
I think if you put it all together, what the clear intent was, was to keep the taxes easily collectible, and to pursue the ease of administration that they had started in 1939, and then just to bring the Social Security wage base definition in line with that, but I don't think saying that meant in any way, or there's no reason to think that Congress thought that what... if they were aware at all of Nierotko, that it had anything to do with taxes.
As far as the Social Security... just two other very brief points.
One is that the Social Security Publication 957 discusses what they... their method is, and they do give an option, because they say you can... you report the back pay on your W-2, and then if you file another filing allocating it back, we'll look at that.
If you don't, you can just leave it allocated on the W-2 for the year it was paid.
And finally, just one other point that I thought was interesting is that the 19... Mr. Phillips referred to the 1943 income tax provision that did allow some attributing back pay to prior years.
That was limited to where it was 15 percent or more of your wages, but this was a statute which they enacted, and it's called Section 119, Back Pay Attributable to Prior Years, and it starts off, if the amount of back pay received or accrued by an individual, and so on.
So when Congress wanted to address the back pay problem in the income tax context, right around this time, they did it, they did it in express language, they kept that into effect, in effect for a certain number of years, they limited it to where it's more than 15 percent of the income, and then they got rid of it when they found that that was too difficult to work, in, I think, 1961 or so.
None of those things happened with respect to, in 1946 with respect to the Nierotko decision, or the FICA and FUTA taxes at issue here.
Chief Justice Rehnquist: Thank you, Mr. Feldman.
The case is submitted.
The honorable court is now adjourned until tomorrow at ten o'clock.
Argument of Speaker
Mr. Phillips: The opinion of the Court in No. 00-203, United States versus Cleveland Indians Baseball Company will be announced by Justice Ginsburg.
Argument of Justice Ginsburg
Mr. Ginsburg: The Federal Insurance Contributions Act or FICA and the Federal Unemployment Tax Act, FUTA, imposed taxes on employee wages to fund Social Security, Medicare, and unemployment compensation programs.
This case concerns the application of those taxes to backpay awards.
The essential facts, the Cleveland Indians settled the controversy with certain baseball players by paying them back wages in 1994.
Those wages should have been paid in 1986 and 1987.
The Internal Revenue Service maintains that the Cleveland Indians must pay the taxes according to the rates in effect in 1994, the Cleveland Indians and players on the other hand say, the years 1986 and 1987 are determinative.
In those years as you may already have gleamed tax rates and the amount of wages subject to the tax were lower.
The District Court and the Court of Appeals for the Sixth Circuit ruled in the Cleveland Indians' favor holding that 1986 and 1987 were the proper references which meant that the baseball company owed no FICA and FUTA taxes on the backpay and would qualify for a sizeable refund.
Other Courts of Appeals in other cases however have upheld the Internal Revenue Service position that the year of actual payment, year 1994 is the year that counts in determining tax rates and the amount of wages subject to tax.
Using 1994 tax rates and wage basis, the total on Cleveland Indians exceeded a $100,000.
We do not find a clear and certain answer in the text of the governing Internal Revenue Cpde provisions.
Those provisions state simply that FICA and FUTA taxes are levied on “wages paid during a calendar year”.
Our own case law concerning the treatment of backpay for employee benefit eligibility purposes indicates that the word formulation Congress used, “wages paid during the calendar year” does not have a dispositively plain meaning.
We are satisfied however that the Internal Revenue Service reading of the Tax Code provision is reasonable.
That reading reflecting a long standing treasury regulations and rulings interpreting the regulation have been consistently maintained by the service, using rates and wage bases effective in the years in which the back wages are actually paid does not strain the statute’s text and serves to reduce complexity in administering the FICA and FUTA tax schemes.
According due respect to the Secretary’s steady construction, we hold that back wages are subject to FICA and FUTA taxes prescribed for the year in which the wages are in fact paid.
We therefore reverse the judgment of the Sixth Circuit.
Justice Scalia has filed an opinion concurring in the judgment.