Acknowledging a difference in conclusion on the issue among its sister federal appellate courts, the 3 rd U.S. Circuit Court of Appeals ruled that relinquishing tenure from the university was analogous to severance pay. As such, the appellate judges ruled, the payments qualified as taxable wages under the Federal Insurance Contribution Act (FICA).
“Because tenure is a form of compensation for past services to the university, payments offered as a substitute for tenure are compensation and therefore taxable as wages,” Circuit Judge Julio M. Fuentes wrote in the opinion, joined by Circuit Judge Michael A. Chagares.
According to the ruling, from 1996 to 2001, the university paid over $2 million in FICA taxes on the payments to the tenured faculty. In 2001, it sought a refund from the Internal Revenue Service (IRS) on the ground that the earlyretirement payments were not “wages,” but instead were “buyouts” not subject to FICA taxes. The IRS denied the refund, and the university sued.
In the majority opinion, Fuentes noted that the eligibility requirements for payments under the university’s plans are “linked to past services at the university, not relinquishment of tenure.” The eligibility requirements for both tenured and nontenured workers were based on the employee’s age and years of service, Fuentes noted.
However, Chief Circuit Judge Anthony J. Scirica dissented from the majority holding, saying he would instead have upheld a ruling by U.S. District Judge Donetta Ambrose of the U.S. District Court for the Western District of Pennsylvania awarding a refund of more than $2 million to the university.
The appellate judges threw out Ambrose’s ruling for the university and sent the matter back for an order in favor of the government. The 3rd Circuit ruling is here .