Paul L. Caron

Saturday, November 3, 2007

3rd Circuit: Early Retirement Payments to Tenured Pitt Faculty Constitute Wages Subject to FICA

The Third Circuit in a 2-1 decision on Friday reversed the district judge and held that early retirement payments by the University of Pittsburgh to its tenured faculty are taxable wages under FICA.  University of Pittsburgh v. United States, No. 06-1276 (3rd Cir. 11/2/07):

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. ...

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.

Chief Judge Anthony J. Scirica dissented on the ground that the payments were made for the relinquishment of the property right in tenure at the University, not remuneration for employment, and thus were not subject to FICA.  (Hat Tip:  Howard Bashman.)

Update:  The Legal Intelligencer: 3rd Circuit Finds Retirement Packages for Tenured Professors Are Taxable, Shannon P. Duffy (Hat Tip:  Howard Bashman.)

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