U.S. Supreme Court Gives Break to Railroad Employees

divorce stock options railroad workers

Today, the U.S. Supreme Court decided Wisconsin Central Ltd. v. United States, holding that under the Railroad Retirement Tax Act, employee stock options are not considered “compensation” and are therefore exempt from federal and state income tax. This decision could impact thousands of divorces moving forward because of the many employees of the country’s major railroads.

The case turned on the meaning of the phrase “money remuneration” in the statute. Only funds considered “money remuneration” are subject to taxation. The Court traced the history of the Act and noted that at the time of its enactment railroads provided employees many non-monetary benefits like lodging, food, railroad tickets and other in-kind items. With this knowledge, Congress meant the phrase “money remuneration” to refer to receipt of actual currency, which typically would be one’s salary. The Court did not see stock options as like money, because they need to be sold or cashed in to become currency. The Court looked to other federal statutes that made a similar distinction between stock and currency.

So, the bottom line of the holding is that stock options are received tax free.

The holding of Wisconsin Central can impact divorces moving forward because it now increases the value of the marital portion of any railroad stock options received by an employee of the railroads. When these sums fall into the marital estate, courts should now be aware of this new change in the law and the implications it has on valuation. Often courts take into consideration the tax loss that might follow with division of certain assets; now that these stock options have no tax consequences through division and ultimate transfer into cash, the value increases. Parties to divorce should consider this fact as a settlement tool as well.

So, to all the railroad employees out there – congratulations!

If you have questions about railroad stock options and divorce, contact us – we can help.