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Bertrand M. Harding Jr.
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College & University Tax Report


Bertrand M. Harding, Jr., Editor February 2007, Volume 12, Issue 2


Ever since the 8th Circuit decided the North Dakota State University case in 2001, many colleges and universities, both within the states covered by the 8th Circuit and outside that geographical area, have taken the position that early retirement payments made to tenured faculty members should not be treated as "wages" subject to wage withholding, FICA, and other employment taxes. (The geographic area of the 8th Circuit covers Arkansas, Iowa, Minnesota, Missouri, Nebraska, North Dakota, and South Dakota). These schools have instead followed the 8th Circuit's rationale and treated these payments as made in return for the release of a valuable property right held by the faculty members - their right to tenure.

The IRS has always disagreed with the 8th Circuit's decision in the NDSU case, and has refused to follow its "nonwage" holding in cases arising outside the jurisdiction of the 8th Circuit. It continued to litigate these non-8th Circuit cases in the hope of convincing a court that the 8th Circuit's decision was wrong. For those cases arising within the geographical area covered by the 8th Circuit, however, the IRS allowed the early retirement payments to be treated as nonwages for employment tax purposes because the agency felt bound the by 8th Circuit's decision in the NDSU case.

Last year, the IRS was successful in convincing a court that its "wage" position was correct with the issuance by the 6th Circuit of its opinion in Appoloni v. U.S., 450 F.3d 185 (6th Cir. 2006). It is important to note, however, that the Appoloni case did not involve tenured university faculty members; rather, the tenured teachers were public school teachers whose tenure rights were somewhat different (and less substantive) than the tenure rights held by the NDSU faculty members and by college and universities faculty members generally.

The taxpayer in the Appoloni case appealed the decision to the Supreme Court, and many observers believed that the Court would agree to hear the case because of what appeared to be a clear split between the 6th and 8th Circuits. But the Supreme Court has recently announced that it will not hear an appeal of the Appoloni case.

The Supreme Court's refusal to resolve what appears to be a conflict between the 6th and 8th Circuits could mean that it believes that the issue should be further litigated to allow other courts of appeal to analyze the issue before it steps into the fray. Or, the Court might be of the view that there really is no conflict between the 6th and 8th Circuit court decisions because of the substantive difference in the tenure rights granted to the NDSU faculty members versus the less substantive rights granted to the public school teachers in the Appoloni case. In this regard, it is interesting to note that the government itself, in a brief filed with the Supreme Court arguing against Supreme Court review, strongly suggested such a distinction, saying:

While expressing disagreement with the reasoning of the Eighth Circuit in North Dakota, the Sixth Circuit also noted that "North Dakota is factually distinguishable." The court explained that "the tenure rights in North Dakota were created by a single contract made at the onset of the tenure relationship," and that tenure for North Dakota professors was not automatic after a specified period of service but depended on a variety of factors. Although the government does not believe that the correct application of 26 U.S.C. 3121(a) turns on those factual distinctions, the Sixth and Eighth Circuits each attached significant weight to facts that were not present in the other case. For that reason, no square conflict between the two decisions exists. [Citations to the record omitted].

Shortly after the Supreme Court announced that it would not hear the Appoloni case, the IRS issued Action on Decision 2007-1 in which it stated that it would no longer follow the 8th Circuit's NDSU case in the geographical area of the 8th Circuit. (AOD 2007-1 can be found on the IRS website at

In this notice, the IRS said that it is modifying its litigating position involving early retirement payments made to tenured faculty members within the 8th Circuit on the theory that the 8th Circuit relied on a 1958 revenue ruling in reaching is conclusion (Rev. Rul. 58-301), and that in late 2004 the IRS issued Rev. Rul. 2004-110, which superseded this 1958 ruling. Therefore, the IRS said that it will follow the NDSU holding within the 8th Circuit only for cases that have the "exact same facts" as the NDSU case and where the payments at issue are made before January 12, 2005. For cases with different facts, the IRS will contest the issue within the 8th Circuit no matter when the payments are made.

To summarize where things currently stand, the future fate of early retirement payments made to college and university faculty members is unclear. The IRS will no doubt continue to assert deficiencies where it finds nonwage treatment (both within and without the states covered by the 8th Circuit), and it will be interesting to see how these other courts interpret the Supreme Court's refusal to hear the Appoloni case. On the one hand, a court may believe that the Supreme Court is looking for additional analysis by different courts and will decide the case based on its reading of the NDSU and the Appoloni decisions. Or, the court may conclude that the Supreme Court implicitly said that the type of tenure held by college and university faculty members is so substantial as to cause the early retirement payments to be treated as payments made in return for a release of those rights, and not as wages.

links updated 6/25/08 rab

Links checked July 2nd, 2010, FJL.