BNSF RAILWAY COMPANY, formerly the Burlington Northern and Santa Fe Railway Company, as successor by merger to Burlington Northern Railroad Company and the Atchison Topeka and Santa Fe Railway Company, Plaintiff - Appellee
UNITED STATES OF AMERICA, Defendant - Appellant
Appeal from the United States District Court for the Northern District of Texas.
For Bnsf Railway Company, formerly: The Burlington Northern and Santa Fe Railway Company, as successor by merger to Burlington Northern Railroad Company and The Atchison Topeka and Santa Fe Railway Company, Plaintiff - Appellee: Mary Bell Hevener, Steven Paul Johnson, Robert Ryan Martinelli, Morgan, Lewis & Bockius, L.L.P., Washington, DC; William F. Colgin Jr., Morgan, Lewis & Bockius, L.L.P., Palo Alto, CA; Allyson Newton Ho, Ellen L. Perlioni, Morgan, Lewis & Bockius, L.L.P., Dallas, TX.
For United States of America, Defendant - Appellant: Ellen Page DelSole, Kenneth L. Greene, U.S. Department of Justice, Washington, DC; Curtis Cutler Smith, U.S. Department of Justice, Dallas, TX.
Before HIGGINBOTHAM, OWEN, and HIGGINSON, Circuit Judges.
HIGGINBOTHAM, Circuit Judge:
BNSF Railway Company (" BNSF" ) filed suit seeking refunds of certain taxes that it, and its predecessor companies, paid pursuant to the Railroad Retirement Tax Act (" RRTA" ). BNSF claimed that it overpaid when it included (i) Non-Qualified Stock Options (" NQSO" ), and (ii) certain moving expenses as taxable compensation. The parties stipulated to the facts and, on cross-motions for summary judgment, the district court granted summary
judgment in favor of BNSF on all its refund claims. We REVERSE.
BNSF is a rail carrier that operates an international railroad system consisting of approximately 32,000 miles of rail throughout the Western United States and Canada. BNSF was formed by the 1996 merger of The Atchison Topeka and Santa Fe Railway Company with the Burlington Northern Railroad Company. At issue in this case are (i) Burlington Northern Railroad Company's 1993, 1994, and 1995 tax years; (ii) The Atchison Topeka and Santa Fe Railway Company's 1994 and 1995 tax years; and, (iii) BNSF's 1996, 1997, and 1998 tax years.
As a rail carrier, BNSF and its employees are subject to the Railroad Retirement Tax Act (" RRTA" ). BNSF now seeks a refund of the employer and employee portions of taxes paid on the exercise of NQSOs and certain moving expenses.
During the tax years at issue, BNSF offered salaried employees and executives a combination of Incentive Stock Options (" ISO" ) and NQSOs. The stated purpose of the stock option plans was to provide employees with a competitive compensation package. At the time the stock option plans were adopted, BNSF paid its employees and executives salaries that were below industry average, but because of the stock option plans, provided an overall compensation package that was above industry average. Each year, BNSF's Board of Directors determined the number of stock options to grant. Once the number was determined, BNSF awarded stock options in part as compensation for services rendered by employees and in part as an award for job performance. These options were then awarded as either ISOs or NQSOs. Additionally, BNSF's Board of Directors determined the final deadline for exercising the options and the vesting period for each option grant.
When an employee exercised a NQSO, the employee would pay the price for the share that was the market price on the day the option was granted (the " strike price" ). Approximately 90-95% of the time, the employee would then sell the share at the same time, such that the employee would only receive the difference between the strike price and the exercise price.
Alternatively, the employee could keep the stocks, either by paying the broker the strike price when executing the option or by selling enough stock to cover the strike price and taxes, and then keeping the remaining shares.
NQSOs were exercised in one of two ways: (i) non-executive employees exercised their NQSOs through BNSF's transfer agent, and (ii) executive employees were permitted to use their private brokers to exercise their NQSOs. Non-executive employees would either fax or hand-deliver an exercise notification sheet to BNSF's compensation department, who would then authorize BNSF's transfer agent to exercise the option. The transfer agent would then either forward the stock certificate to the employee or disburse the net gain amount on the sale of the stock. For executives, the transfer agent would directly transfer the purchased shares to the executive's private broker.
BNSF did not directly pay cash or send the stock certificate to the employee, but it did record all transaction information into a stock option tracking system. BNSF would calculate the amount of RRTA taxes due and would inform the transfer agent of the amount of tax to be withheld.
During the years at issue, 3,192 BNSF employees exercised NQSOs, representing $348,805,183.03 total spread on exercise. BNSF and its employees paid a total of $16,432,583.01 in RRTA taxes on exercised NQSOs.
From 1994 to 1996, many BNSF employees were required to relocate as a result of the consolidation and restructuring of operations, the merger, and employee promotions and transfers. Whenever BNSF asked an employee to move, it would pay a substantial portion of the moving expenses. In total, BNSF paid approximately $135,000,000 in employee moving expenses during the period at issue.
These payments were made pursuant to a written policy in BNSF's relocation manuals for non-union employees and pursuant to collective bargaining agreements for union employees. Typically, BNSF paid moving expenses in one of two ways: (i) by direct payment to the service providers, or (ii) by a lump sum payment to employees, who could generally keep any excess payment over expenses actually incurred and who were not required to provide substantiation. When BNSF paid a lump sum, it typically did so ...