Question

You recently read an article in your school newspaper about Professor Rodney Taylor, one of your favorite professors in the religious studies department. According the article, he and the university have been negotiating an early retirement package and are reached a stumbling block. Under the agreement, Professor Taylor is to receive a lump-sum payment equal to one year's salary in exchange for his retirement and the release of any and all rights associated with his tenure status. While recognizing that the payment would be subject to income tax, Taylor contends that the amount is not earned income and thus should not be subject to the FICA tax. The university negotiators say that they are not aware of any authority that supports Taylor's view. In fact, they have learned that other universities in the state system have been withholding amounts for FICA for years in situations involving early retirement buyout packages for high-level administrators. The university's position is that lacking the authority to not withhold for FICA and given the precedent set in similar early retirement packages at other universities, they are obligated to withhold FICA from the payment. You want to come to the aid of Professor Taylor. Obviously, if the payments are considered wages subject to the FICA tax, the value of the offer to Professor Taylor will be significantly reduced. Can you find any authority for his position? Evaluate the position of the university and of the professor. Do the following: (1) Give your opinion. In it, show authorities, citing law, regulations, interpretations and decisions applicable. (2) Enumerate and explain every step you take in reaching your result. These are extremely important - just as important as the conclusion itself.

Answer 1

In the given case, Mr Taylor is a university professor who is on the verge of accepting an early retirement package equal to one year remuneration in exchange for his retirement and the release of any and all rights associated with his tenure status. As per the university such emoluments are subjected to the FICA withholding tax since they are paying the remuneration. As per my opinion the FICA tax is applicable on the wages paid by the employer to the employee and therefore we have to first check whether the early retirement package falls in the purview of wages or not. Early retirement package was made to buy out the contract of the faculty member and to end up his tenure early, they are not to be considered as wages. As a result, in my opinion no FICA Tax is applicable on such package.

The citation is given by a federal district court in North Dakota in 1999 where it was decided that such remuneration paid for buying out the contract rights and tenure of university professors will not amount to wages and therefore will not be subject to FICA withholding tax. North Dakota State University v. United States, 1999 U.S. Dist. LEXIS 20524 (D.C.N.D. 11/19/99).