United States v. Cleveland Indians Baseball Company

PETITIONER: United States
RESPONDENT: Cleveland Indians Baseball Company
LOCATION: Office of Attorney General

DOCKET NO.: 00-203
DECIDED BY: Rehnquist Court (1986-2005)
LOWER COURT: United States Court of Appeals for the Sixth Circuit

CITATION: 532 US 200 (2001)
ARGUED: Feb 27, 2001
DECIDED: Apr 17, 2001

ADVOCATES:
Carter G. Phillips - Argued the cause for the respondent
James A. Feldman - Department of Justice, argued the cause for the petitioner

Facts of the case

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.

Question

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?

Media for United States v. Cleveland Indians Baseball Company

Audio Transcription for Oral Argument - February 27, 2001 in United States v. Cleveland Indians Baseball Company

Audio Transcription for Opinion Announcement - April 17, 2001 in United States v. Cleveland Indians Baseball Company

The opinion of the Court in No. 00-203, United States versus Cleveland Indians Baseball Company will be announced by Justice Ginsburg.

Ruth Bader 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.