Jack, a tenured university professor, has been a malcontent for many years at Rockport University in Fargo, North Dakota. The university recently offered to pay $800,000 to Jack if he will relinquish his tenure position and resign. Jack wants to know how the $800,000 payment will be taxed.
Jack, a tenured university professor, has been a malcontent for many years at Rockport University in Fargo, North Dakota. The university recently offered to pay $800,000 to Jack if he will relinquish his tenure position and resign.
Whether the $800,000 will be taxed?
In this case, we believe that Jack can rely on an Eighth Circuit decision, North Dakota State Univ. v. United States [ 2001-2 ustc ¶50,485 LK:NON: USTFIN 2001-2USTCP50485 ], 255 F.3d 599 (8th Cir. 2001) and claim that the payment should not subject to withholding.
In North Dakota, the Eighth Circuit held that payments were made to tenured university professors pursuant to an early retirement program were not wages for FICA purposes. The revenue ruling relied on by the Eighth Circuit is Revenue Ruling 58-301.
In Revenue Ruling 58-301 LK:NON: RULINK REVRUL58-301 , an employee with a five-year contract right to employment agreed to relinquish that right during the second year in exchange for a lump sum payment. The IRS concluded that payments for relinquishment of rights under a contract are not “wages” under FICA.
However, the case in North Dakota is distinguishable and that the payments at issue in the similar cases easily fit within the statutory definition of “wages.” Rev. Rul. 75-44 LK:NON: RULINK REVRUL75-44 , 1975-1 CB 15 is relied in the other circuits besides the Eighth Circuit.
In Rev. Rul 75-44, an employee had acquired both the rights to security in his employment and to additional pay or other recognition for longevity under a general contract of employment. The employer then paid a lump sum payment to the employee to enter into an agreement with the employer to perform a different type of work and to refrain from asserting employment rights that the employee had previously acquired. The IRS determined that the amount received by the employee was a lump sum settlement for the past performance of services reflected in the employment rights that the employee was giving up, and was money remuneration for services. The IRS concluded in this ruling that the lump sum payment was compensation for services under the Railroad Retirement Tax Act (“RRTA”) and constituted wages for income tax withholding purposes.
In conclusion, the Eighth Circuit held that a payment made to a tenured faculty member under the taxpayer’s early retirement program was made in exchange for the relinquishment of the tenured faculty member’s contractual and constitutionally-protected tenure rights rather than as remuneration for services to taxpayer. The court cited Rev. Rul. 58-301 , 1958-1 C.B. 23, as support for its decision and rejected the government’s argument that Rev. Rul 75-44 , 1975-1 C.B. 15, should control the outcome of this case. Therefore, the payment made by Rockport University to Jack who, upon accepting the payments, relinquished his statutory tenure rights and resigned from their positions, is NOT wage taxable under the Federal Insurance Contribution Act (FICA)
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