No. 00-203 

In the Supreme Court of the United States 

UNITED STATES OF AMERICA, PETITIONER 

v. 

CLEVELAND INDIANS BASEBALL COMPANY, 
A LIMITED PARTNERSHIP 

ON WRIT OF CERTIORARI TO 
THE UNITED STATES COURT OF APPEALS 
FOR THE SIXTH CIRCUIT 

BRIEF FOR THE UNITED STATES 

SETH P. WAXMAN 

Solicitor General 

Counsel of Record 

PAULA M. JUNGHANS 

Acting Assistant Attorney 

General 

LAWRENCE G. WALLACE 

Deputy Solicitor General 

KENT L. JONES 

Assistant to the Solicitor 

General 

KENNETH L. GREENE 
ROBERT W. METZLER 

Attorneys 

Department of Justice 
Washington, D.C. 20530-0001 
(202)514-2217 

QUESTION PRESENTED 

Whether, for purposes of the Federal Insurance 
Contributions Act, 26 U.S.C. 3101-3128, and the Fed- 
eral Unemployment Tax Act, 26 U.S.C. 3301-3311, an 
award of back wages should be attributed to the year in 
which the award was actually paid or, instead, to the 
year in which the events that gave rise to the award 
occurred. 

(I) 

TABLE OF CONTENTS 

Page 

Opinions below ............................................................................... 
1 

Jurisdiction ...................................................................................... 1 

Statutory provisions and regulations involved ........................ 
2 

Statement ........................................................................................ 2 

Summary of argument .................................................................. 
8 

Argument: 

For FICA and FUTA tax purposes, an award of 

back wages is to be attributed to the year in which 

the award is actually paid, and not to the year or 

years in which the events occurred that gave rise 

to the award ............................................................................ 

11 

A. The plain language of the relevant statutes, 

their legislative history, and the applicable 

treasury regulations demonstrate that back 

wages are to be attributed to the year of pay- 
ment for FICA and FUTA tax purposes ................... 

11 

1. The FICA provisions .............................................. 
13 

2. The FUTA provisions ............................................ 
21 

B. The Bowman case, on which the court of appeals 

based its decision, was wrongly decided .................... 

25 

Conclusion ....................................................................................... 35 

TABLE OF AUTHORITIES 

Cases: 

Atlantic Mut. Ins. Co. v. Commissioner, 523 

U.S. 382 (1998) ........................................................................ 

20 

Bowman v. United States, 824 F.2d 528 (6th Cir. 

1987) .............................................................................. 

7, 9, 26, 28 

Cottage Sav. Ass’n v. Commissioner, 499 U.S. 554 

(1991) ........................................................................................ 

9, 20 

Flemming v. Nestor, 363 U.S. 603 (1960) .......................... 28 

(III) 

IV 

Cases—Continued: Page 

Freedomland, Inc., In re, 480 F.2d 184 (2d Cir. 1973), 

aff ’d sub nom. Otte v. United States, 419 U.S. 43 

(1974) .................................................................................... 

30, 31 

Hemelt v. United States, 122 F.3d 204 (4th Cir. 

1997) ............................................................................... 

10, 33, 34 

Johnston v. Harris County Flood Control Dist., 

869 F.2d 1565 (5th Cir. 1989) ............................................... 

33 

Mazur v. Commissioner, 986 F. Supp. 752 (W.D. 

N.Y. 1997) ............................................................................... 

28 

National Muffler Dealers Ass’n v. United States, 

440 U.S. 472 (1979) ................................................................ 

20 

Otte v. United States, 419 U.S. 43 (1974) ................. 

10, 31, 32 

Social Security Board v. Nierotko, 327 U.S. 358 

(1946) ........................................................................... 

9, 10, 26, 27 

United States v. Correll, 389 U.S. 299 (1967) ............... 

20, 25 

Walker v. United States, 202 F.3d 1290 (10th 

Cir. 2000) .................................................................. 

10, 29, 34, 35 

Statutes and regulations: 

Act of July 1, 1972, Pub. L. No. 92-336, § 202(b)(1), 86 

Stat. 416 (42 U.S.C. 430) ....................................................... 

4 

Employee Retirement Income Security Act of 1974, 

Pub. L. No. 93-406, § 502, 88 Stat. 891 ............................... 

33 

Employment Security Amendments of 1970, Pub. L. 

No. 91-373, § 302, 84 Stat. 713 ............................................. 

25 

Federal Insurance Contribution Act (Internal Rev- 
enue Code of 1986, Ch. 21), 26 U.S.C. 3101-3128 ........ 

passim 

26 U.S.C. 3101 ........................................................... 

2, 12, 19 

26 U.S.C. 3101(a) ..................................... 

3, 4, 12, 13, 14, 32 

26 U.S.C. 3101(b) ................................................. 

3, 4, 12, 13 

26 U.S.C. 3102 ................................................................... 

5 

26 U.S.C. 3102(a) .......................................................... 

14, 31 

26 U.S.C. 3111 ........................................................... 

2, 12, 19 

26 U.S.C. 3111(a) .................................. 3, 4, 8, 11-12, 13, 14 

V 

Statutes and regulations—Continued: 

Page 

26 U.S.C. 3111(b) ....................................... 

3, 4, 8, 11-12, 13 

26 U.S.C. 3121 ................................................................... 

2 

26 U.S.C. 3121(a) ...................................................... 

4, 5, 19 

26 U.S.C. 3121(a) (1982 & Supp. III 1985) ................... 

4 

26 U.S.C. 3121(a)(1) ................................ 

4, 12, 14, 16-17, 20 

26 U.S.C. 3121(a)(1) (1982) .............................................. 

12 

26 U.S.C. 3121(v)(2) ......................................................... 

17 

Federal Unemployment Tax Act (Internal Revenue 

Code of 1986, Ch. 23), 26 U.S.C. 3301-3311 .................. 

passim 

26 U.S.C. 3301 .............................................. 

2, 4, 5, 8, 12, 21 

26 U.S.C. 3306 ................................................................... 

2 

26 U.S.C. 3306(b) .............................................................. 

5 

26 U.S.C. 3306(b)(1) ........................................ 

12, 21, 23, 24 

26 U.S.C. 3306(r)(2) .......................................................... 

17 

Internal Revenue Code of 1939, § 1426(a)(1), 

26 U.S.C. 1426(a)(1) (1940) ................................................... 

17 

Internal Revenue Code of 1986, 26 U.S.C. 1 et seq.: 

26 U.S.C. 31(b) ........................................................................ 

31 

26 U.S.C. 3402 ........................................................................ 

5 

26 U.S.C. 3402(a) .................................................................... 

32 

26 U.S.C. 6413(c)(1) .................................................... 

14, 30, 31 

Self-Employment Contributions Act of 1954, 42 U.S.C. 

1401 ......................................................................................... 34 

Social Security Act, ch. 531, 49 Stat. 620 (42 U.S.C. 

301-1397jj) .................................... 

11, 14, 17, 22, 24, 26, 27 

Tit. II, 49 Stat. 622 ...................................................... 

9-10, 27 

§ 210(a), 49 Stat. 625 ............................................... 

26, 27 

§ 210(b), 49 Stat. 625 ................................................... 

27 

Tit. VIII, 49 Stat. 636 ....................................................... 

26 

§ 801, 49 Stat. 636 ........................................................ 

8, 15 

§ 804, 49 Stat. 637 ........................................................ 

8, 15 

§ 811(a), 49 Stat. 639 ............................................... 

17, 26 

Tit. IX, 49 Stat. 639: 

§ 901, 49 Stat. 639 .................................................... 

22, 24 

§ 907(b), 49 Stat. 642 ................................................... 24 

VI 

Statutes and regulations—Continued: 

Page 

Social Security Act Amendments of 1939, ch. 666, 

53 Stat. 1360: 

Tit. II, 53 Stat. 1362 (42 U.S.C. 401 et seq.) .................. 

27 

Tit. VI, 53 Stat. 1381 (26 U.S.C. 1400 et seq. 

(1940)): 

§ 601, 53 Stat. 1382 .................................................... 

8, 15 

§ 604, 53 Stat. 1383 .................................................... 

8, 15 

§ 608, 53 Stat. 1387 ...................................................... 

22 

Social Security Act Amendments of 1946, ch. 951, 

60 Stat. 978: 

§ 412(a), 60 Stat. 989 ......................................................... 

9, 17 

§ 412(b), 60 Stat. 989 ......................................................... 

9, 24 

§ 414(a)(3), 60 Stat. 991 ................................................ 

10, 27 

Tax Equity and Fiscal Responsibility Act of 1982, 

Pub. L. No. 97-248, § 271(a), 96 Stat. 554 .......................... 

25 

Unemployment Compensation Amendments of 1976, 

Pub. L. No. 94-566, § 211(a), 90 Stat. 2676 ........................ 

25 

Treas. Reg.: 

Reg. 91 (1936): 

Art. 202 ............................................................................... 

15 

Art. 302 ............................................................................... 
15 

Reg. 106 (1940): 
§ 402.301 ........................................................................... 19 

§ 402.302 ....................................................................... 

16, 19 

§ 402.303 ........................................................................... 19 

§ 402.401 ........................................................................... 19 

§ 402.402 ....................................................................... 

16, 19 

§ 402.403 ........................................................................... 19 

Reg. 106 (as amended by T.D. 5566, 1947-2 C.B. 
148) ....................................................................................... 19 

Reg. 107 (as amended by T.D. 5566, 1947-C.B. 
148) ....................................................................................... 19 

20 C.F.R. 404.1242 .................................................................... 

28 

26 C.F.R.: 

Section 31.3101-2(c) ............................................................... 

2, 19 

Section 31.3101-3 .................................................................... 
2, 19 

Section 31.3111-2(c) ............................................................... 
2, 19 

Section 31.3111-3 .................................................................... 2, 19 

VII 

Regulations—continued Page 

Section 31.3121(a)-2 ............................................................... 
2 

Section 31.3121(a)-2(a) ...................................................... 
19, 34 

Section 31.3121(a)(1)-1(a)(2) .............................................. 
2, 20 

Section 31.3301-2 .................................................................. 
2, 24 

Section 31.3301-3(b) ............................................................... 
24 

Section 31.3306(b)(1)-1 ......................................................... 
2 

Section 31.3306(b)(1)-1(a)(1) ................................................ 
25 

Section 31.3306(b)(1)-1(a)(2) ................................................ 
25 

Miscellaneous: 

W. Cohen, The Development of the Social Security Act 
of 1935: Reflections Some Fifty Years Later, 6 Soc. 
Sec. Rep. Ser. 933 (1984) .................................................. 

11, 12 
50 Fed. Reg. 45,559 (1985) ....................................................... 
4 

51 Fed. Reg. 40,257 (1986) ....................................................... 
4 

58 Fed. Reg. 58.004 (1993) ....................................................... 
4 

K. W. Gideon, Lawsuits and Settlements (1995) ................. 
29 

H.R. Rep. No. 1337, 83d Cong., 2d Sess. (1954) ................... 
18 

H.R. Rep. No. 2447, 79th Cong., 2d Sess. (1946) ....... 
18, 24, 28 

H.R. Rep. No. 728, 76th Cong., 1st Sess. (1939) ........ 
16, 22, 30 

Rev. Rul. 55-203, 1955-1 C.B. 114 .......................................... 
20 

Rev. Rul. 57-92, 1957-1 C.B. 306 ............................................ 
20 

Rev. Rul. 78-336, 1978-2 C.B. 255 .......................................... 
20 

Rev. Rul. 89-35, 1989-1 C.B. 280 ............................................ 
20 

S. Rep. No. 734, 76th Cong., 1st Sess. (1939) ............. 
16, 22, 30 

S. Rep. No. 1862, 79th Cong., 2d Sess. (1946) ............ 
18, 24, 28 

S. Rep. No. 1622, 83d Cong., 2d Sess. (1954) ........................ 
18 

SSA, Dep’t of Health & Human Servs., Reporting 

Reporting Back Pay and Special Wages Payments 

., Pub. L. No. 957 (Sept. 
1997) ......................................................................................... 28 

SSA, Dep’t of Health & Human Servs., SSR 83-7, 
1981-1991 Soc. Sec. Rep. Serv. (1983) ................................ 

28 

T.D. 5566, 1947-2 C.B. 148 ....................................................... 
19 

T.D. 6516, 25 Fed. Reg. 13,032 (1960) .................................... 19 

In the Supreme Court of the United States 

No. 00-203 

UNITED STATES OF AMERICA, PETITIONER 

v. 

CLEVELAND INDIANS BASEBALL COMPANY, 
A LIMITED PARTNERSHIP 

ON WRIT OF CERTIORARI TO 
THE UNITED STATES COURT OF APPEALS 
FOR THE SIXTH CIRCUIT 

BRIEF FOR THE UNITED STATES 

OPINIONS BELOW 

The opinion of the court of appeals (Pet. App. 1a-5a) 
is unpublished, but the decision is noted at 215 F.3d 
1325 (Table). The opinion of the district court (Pet. 
App. 6a-11a) is unreported. 

JURISDICTION 

The judgment of the court of appeals was entered on 
May 10, 2000. The petition for a writ of certiorari was 
filed on August 8, 2000, and was granted on October 16, 
2000. The jurisdiction of this Court is invoked under 28 
U.S.C. 1254(1). 

(1) 

2 

STATUTORY PROVISIONS AND REGULATIONS 
INVOLVED 

The relevant portions of Sections 3101, 3111, 
3121, 3301, and 3306 of the Internal Revenue Code, 
26 U.S.C. 3101, 3111, 3121, 3301, and 3306, and of 
Sections 31.3101-2(c), 31.3101-3, 31.3111-2(c), 31.3111-3, 

31.3121(a)-2, 31.3121(a)(1)-1(a)(2), 31.3301-2, and 

31.3306(b)(1)-1 of the Treasury Regulations on Employ- 
ment Taxes and Collection of Income Tax at Source, 26 
C.F.R. 31.3101-2(c), 31.3101-3, 31.3111-2(c), 31.3111-3, 

31.3121(a)-2, 31.3121(a)(1)-1(a)(2), 31.3301-2, and 

31.3306(b)(1)-1, are set forth at J.A. 21-30. 

STATEMENT 

1. Respondent is one of 26 major league baseball 
clubs that are parties to a collective bargaining agree- 
ment negotiated with the Major League Baseball Play- 
ers Association. Pet. App. 7a. The players association 
filed grievances claiming that, in 1986, 1987, and 1988, 
the clubs violated the free agency rights of the players 
under the collective bargaining agreement. Id. at 2a, 
7a. An arbitration panel issued rulings in 1990 con- 
cluding that the clubs had interfered with the players’ 
free agency rights and thereby depressed the players’ 
salaries. To settle these grievances, the clubs agreed to 
pay $280 million into two accounts administered by a 
custodian for distribution to the players who had suf- 
fered damages. Ibid. The custodian was required to 
establish separate accounts for each of the clubs and, 
acting as agent for the clubs, was to deduct from the 
settlement payments any applicable federal income or 
employment taxes required to be withheld. J. A. 24; 
C.A. App. 37. 

Under the agreed distribution plan, eight players 
who were employees of respondent during 1986, and 

3 

fourteen players who were employees of respondent 
during 1987, received awards. The awards were paid in 
1994. Pet. App. 3a, 7a.1 These payments aggregated 
$829,638 (including $219,638 denominated as interest) 
for violations of the collective bargaining agreement 
occurring in 1986 and $1,866,967 (including $409,119 
denominated as interest) for violations occurring in 
1987. Id. at 2a, 8a; J.A. 26; C.A. App. 11-12. 

2. As part of the Federal Insurance Contributions 
Act (FICA), Section 3101(a) and (b) of the Internal 
Revenue Code “impose[] on the income of every indi- 
vidual” taxes to fund Social Security and Medicare 
“equal to [a percentage] of the wages (as defined in sec- 
tion 3121(a)) received by him with respect to employ- 
ment.” 26 U.S.C. 3101(a), (b). Similarly, Sections 
3111(a) and (b) “impose[] on every employer” taxes to 
fund Social Security and Medicare “equal to [a per- 
centage] of the wages (as defined in section 3121(a)) 
paid by him with respect to employment.” 26 U.S.C. 
3111(a), (b). For both employers and employees, the 
percentage of wages to be paid as Social Security tax 
under Sections 3101(a) and 3111(a) was 5.7 percent in 
1986 and 1987 and rose to 6.2 percent by 1994. 26 
U.S.C. 3101(a), 3111(a). The percentage of wages paid 
by employers and employees as the Medicare tax under 
Sections 3101(b) and 3111(b) has been 1.45 percent since 
1986. 26 U.S.C. 3101(b), 3111(b). 

1 One player who was not actually employed by respondent 
during 1987 also received an award in 1994 that was treated as 
attributable to 1987 under the settlement arrangement. The dis- 
rict court stated that this was because, even though “he was no 
longer in baseball in 1994, he was ‘deemed’ an employee of the last 
team to employ him—the Indians.” Pet. App. 7a n.1. 

4 

The term “wages” is defined for purposes of the 
Social Security tax provisions (Sections 3101(a) and 
3111(a)) to mean “all remuneration for employment, 
including the cash value of all remuneration (including 
benefits) paid in any medium other than cash,” with 
certain exceptions. 26 U.S.C. 3121(a). As relevant 
here, wages do not include “that part of the remunera- 
tion which, after remuneration * * * equal to the 
contribution and benefit base (as determined under 
section 230 of the Social Security Act) with respect to 
employment has been paid to an individual by an 
employer during the calendar year with respect to 
which such contribution and benefit base is effective, is 
paid to such individual by such employer during such 
calendar year.” 26 U.S.C. 3121(a)(1).2 This definition of 
wages also applied for purposes of Sections 3101(b) and 
3111(b) in 1986 and 1987. 26 U.S.C. 3121(a) (1982 & 
Supp. III 1985). By 1994, however, when the settle- 
ment award payments were made in this case, “wages” 
had been defined so that the exclusion for amounts in 
excess of the contribution and benefit base no longer 
applied for purposes of the Medicare tax provisions 
(Sections 3101(b) and 3111(b)). See 26 U.S.C. 
3121(a)(1). 

In addition, as part of the Federal Unemployment 
Tax Act (FUTA), Section 3301 “impose[s] on every 
employer * * * for each calendar year an excise tax, 
with respect to having individuals in his employ, equal 

2 The contribution and benefit base is a fixed dollar amount for 
a particular year determined under the formula contained in 
Section 230 of the Social Security Act, 42 U.S.C. 430. In 1994, the 
base was $60,600. 58 Fed. Reg. 58,004 (1993). In 1986, the base 
was $42,000. 50 Fed. Reg. 45,559 (1985). In 1987, it was $43,800. 
51 Fed. Reg. 40,257 (1986). 

5 

to * * * [a percentage] of the total wages * * * paid 
by him during the calendar year with respect to 
employment * * * .” 26 U.S.C. 3301. During the 
relevant years, the applicable percentage of wages 
constituting this tax was 6.2 percent. Ibid. The term 
“wages” is defined for purposes of Section 3301 in the 
same manner as in Section 3121(a), except “wages” for 
unemployment tax purposes do not include “remunera- 
tion * * * after * * * equal to $7,000 with respect to 
employment has been paid to an individual by an 
employer during any calendar year * * * .” 26 U.S.C. 
3306(b). 

3. When the amounts awarded to respondent’s 
players were paid in 1994, FICA and income taxes were 
withheld by the custodian, on behalf of respondent, 
from the amounts paid.3 Respondent thereafter filed an 
employment tax return for the first quarter of 1994. 
That return reported employer and employee FICA 
taxes attributable to the settlement payments based on 
the entire amount of the awards made in 1994 and using 
the rates and annual ceilings on wages in effect for the 
1994 year. Pet. App. 2a-3a, 7a-8a; J.A. 26-27; C.A. App. 
13, 28. Respondent also filed a return for the calendar 
year 1994 that reported FUTA taxes attributable to the 
settlement payments, again based on the entire amount 
of the awards made in 1994 and using the rates and 
annual ceilings on wages in effect for the 1994 year. 
Pet. App. 2a-3a, 7a-8a. Having remitted the withheld 
taxes, respondent filed a claim for refund that sought to 
recover both the employer’s share of the FICA and 
FUTA taxes it paid and the FICA taxes withheld from 

3 Pursuant to 26 U.S.C. 3102, 3402, employers are generally 
required to withhold from the wages of their employees the em- 
ployee’s share of the FICA tax and income taxes. 

6 

those employees who consented to join in the claim. 
C.A. 93. When the claim for refund was not granted 
within six months, respondent filed this tax refund suit 
in district court to recover the employer’s share of the 
FICA taxes and the FUTA taxes that it paid. Pet. 
App. 3a, 8a.4 

Respondent raised several claims. First, respondent 
asserted that a portion of the award paid in 1994 was 
“interest,” which is not subject to employment tax. 
Second, respondent asserted that the non-interest por- 
tion of the award paid in 1994 did not constitute 
“wages” within the meaning of the employment tax 
statutes. And, third, respondent asserted that, if any 
portion of the award paid in 1994 constituted “wages,” 
it should be attributed for FICA and FUTA tax 
purposes to 1986 or 1987 (when the annual wage ceiling 
had been exceeded by each of the affected players), 
rather than to 1994, when the awards were paid. As a 
result, respondent claimed that no FICA or FUTA 
taxes were due from the 1994 awards. Pet. App. 3a. 

The parties stipulated (i) that the “interest” portion 
of the awards paid in 1994 did not constitute “wages” 
and (ii) that the remainder of those awards constituted 
back wages for the years 1986 and 1987. Pet. App. 3a- 
4a. The parties then filed cross-motions for summary 
judgment that presented a single issue—whether, for 
FICA and FUTA tax purposes, the back wages paid by 
respondent are attributable to 1994, the year in which 
they were paid, or to 1986 and 1987, the years in which 
they would have been earned but for respondent’s 
breach of the collective bargaining agreement. Id. at 
4a, 6a, 9a. 

4 In this suit, respondent does not seek to recover the employee 
share of the FICA taxes. C.A. App. 7-18. 

7 

4. The government acknowledged in its brief to the 
district court that the prior decision of the Sixth Circuit 
in Bowman v. United States, 824 F.2d 528, 530 (1987), 
was controlling precedent on the issue in that court. In 
Bowman, the Sixth Circuit held that for FICA tax 
purposes, “[a] settlement for back wages should not be 
allocated to the period when the employer finally pays 
but should be allocated to the periods when the regular 
wages were not paid as usual.” Id. at 530 (internal 
quotation marks and citation omitted). Because other 
circuits have disagreed with the reasoning and holding 
of Bowman, however, the government’s brief explained 
to the district court that the government desired to 
preserve that issue for appeal. Pet. App. 10a. Ac- 
knowledging that “at least one court has disagreed with 
Bowman,” the district court concluded that judgment in 
favor of the respondent was “dictated” by the Sixth 
Circuit precedent that was controlling in that court. Id. 
at 10a-11a. 

5. The government appealed and filed a petition for 
hearing en banc in view of the circuit conflict. The 
court of appeals denied the petition and referred the 
case to a panel of the court. Pet. App. 4a. 

The panel affirmed. Pet. App. 1a-5a. The panel 
noted that the government argued that the plain lan- 
guage of the FICA and FUTA statutes, the legislative 
history of those provisions, and the pertinent Treasury 
Regulations all demonstrate that Bowman was incor- 
rectly decided and that “the government cites cases 
from our sister circuits that are at odds with our 
Bowman holding.” Id. at 5a. The panel stated, how- 
ever, that it was not required to address the merits of 
the government’s contentions because, “[e]ven if we 
were persuaded by the government’s argument, we are 
bound by the Bowman decision.” Ibid. 

8 

SUMMARY OF ARGUMENT 

1. Sections 3111(a) and (b) of the Internal Revenue 
Code impose the FICA taxes that fund Social Security 
and Medicare on “wages * * * paid” during the calen- 
dar year. Section 3301(a) similarly imposes the FUTA 
tax on “wages * * * paid * * * during the calendar 
year.” No exception to this express statutory rule is 
created for back wages. Under the plain language of 
these statutes, back wages are taxed in the year in 
which they are paid and not in the year in which the 
services were performed or would have been performed 
but for the wrongful conduct of the employer. 

The legislative history of the pertinent statutory 
provisions shows that Congress specifically intended 
wages to be taken into account in the year that they are 
paid, regardless of when earned or when owed by the 
employer. When Congress originally enacted these 
employment taxes in 1935, they were imposed “with 
respect to employment during the calendar year[].” 
Social Security Act, ch. 531, §§ 801, 804, 49 Stat. 636- 
637. In 1939, however, Congress amended the FICA 
and FUTA statutes to provide that the rate of tax 
would no longer be applied on the basis of when the 
services were performed but would instead be applied 
“[w]ith respect to wages received during the calendar 
year[]” in the case of the employee and “[w]ith respect 
to wages paid during the calendar year[]” in the case of 
the employer. Social Security Act Amendments of 
1939, ch. 666, §§ 601, 604, 53 Stat. 1382-1383. Similarly, 
in 1946, a corresponding change was made to the provi- 
sions that place an annual ceiling on the amount of 
wages subject to FICA and FUTA tax to change the 
basis upon which the ceiling was measured from one 
that looked to services performed to one that looked at 

9 

wages paid during the year. Social Security Act 
Amendments of 1946, ch. 951, §§ 412(a), (b), 60 Stat. 
989. 

Consistent with the language of these statutes and 
their legislative history, Treasury Regulations have 
long specified that the relevant year for determining 
the FICA and FUTA taxes is the year in which the 
wages are paid or received. Applying the plain lan- 
guage of these statutes and regulations, the Treasury 
has consistently taken the position in its Revenue 
Rulings that back wages are to be taken into account 
for FICA and FUTA tax purposes in the year they are 
actually paid. Such “Treasury regulations and interpre- 
tations long continued without substantial change 

* * * are deemed to have received congressional 
approval and have the effect of law.” Cottage Sav. 
Ass’n v. Commissioner, 499 U.S. 554, 561 (1991). 

2. The decision in Bowman v. United States, 824 
F.2d 528, 530 (6th Cir. 1987), upon which the court of 
appeals based its decision in this case, is fundamentally 
flawed. The Bowman court failed to address the plain 
text of the statute, and its clear legislative history, 
which demonstrates that Congress did not intend to 
allocate back wages to the year in which the services 
were performed. Instead, the court in Bowman based 
its holding that back wages are to be allocated to the 
year in which the services were performed solely on the 
theory that this result is required by this Court’s 
decision in Social Security Board v. Nierotko, 327 U.S. 
358 (1946). In Nierotko, the issue was whether back 
pay awarded to an employee was to be treated, for 
benefit purposes, as “wages” under the original provi- 
sions of the Social Security Act of 1935 which defined 
that term as “remuneration * * * with respect to 
employment during any calendar year.” Social Security 

10 

Act, ch. 531, § 210(a), 49 Stat. 625. See 327 U.S. at 360. 
The Court held in Nierotko that, for benefit computa- 
tion purposes, back pay constitutes “wages” and should 
be allocated to “the periods when the regular wages 
were not paid as usual.” 327 U.S. at 370. 

In 1946, however, Congress amended the Social Secu- 
rity Act to change the annual “wage” ceiling for benefit 
computation purposes, just as it had done for the FICA 
and FUTA tax provisions. For “remuneration * * * 
with respect to employment * * * paid to an individ- 
ual during any calendar year after 1946,” the annual 
wage ceiling was to be based upon “remuneration 

* * * paid to such individual during such calendar 
year.” Social Security Act Amendments of 1946, ch. 
951, § 414(a)(3), 60 Stat. 991 (emphasis added). The 
statutory scheme considered in Nierotko thus obviously 
differed in this precise critical respect from the statu- 
tory provisions that have been in effect since 1946—the 
provisions that are involved in this case. Moreover, any 
suggestion that the statutory provisions that applied 
for benefit purposes in Nierotko should be applied for 
FUTA and FICA tax purposes in years following the 
1946 amendments is contradicted by the decision of this 
Court in Otte v. United States, 419 U.S. 43 (1974). In 
Otte, the Court pointed out that, under the provisions 
that apply for years after 1946, “the tax is to be 
collected by the employer by deducting ‘from the wages 
as and when paid.’ ” Id. at 51. As the Fourth Circuit 
concluded in Hemelt v. United States, 122 F.3d 204, 210 
(1997), and the Tenth Circuit concluded in Walker v. 
United States, 202 F.3d 1290, 1292-1293 (2000), the 
court below erred in Bowman in relying on Nierotko 
and in refusing to consider the plain text and clear his- 
tory of the applicable FICA and FUTA tax provisions. 

11 

ARGUMENT 

FOR FICA AND FUTA TAX PURPOSES, AN AWARD 
OF BACK WAGES IS TO BE ATTRIBUTED TO THE 
YEAR IN WHICH THE AWARD IS ACTUALLY PAID, 
AND NOT TO THE YEAR OR YEARS IN WHICH THE 
EVENTS OCCURRED THAT GAVE RISE TO THE 
AWARD 

A. The Plain Language Of The Relevant Statutes, Their 

Legislative History, And The Applicable Treasury 

Regulations Demonstrate That Back Wages Are To Be 

Attributed To The Year Of Payment For FICA And 

FUTA Tax Purposes 

Under a settlement resolving player grievances, 
respondent paid back wages to its players in 1994 for 
services that were performed in 1986 and 1987. The 
court of appeals erred in holding that these back wages 
should be allocated for FICA and FUTA tax purposes 
to the years in which the wages were earned or should 
have been paid rather than to the year in which they 
actually were paid. Pet. App. 4a-5a.5 Sections 3111(a) 

5 The statutory provisions involved in this case are set forth in 
the Federal Insurance Contributions Act (FICA), Chapter 21, 
Internal Revenue Code of 1986, 26 U.S.C. 3101-3128, and the 
Federal Unemployment Tax Act (FUTA), Chapter 23, Internal 
Revenue Code of 1986, 26 U.S.C. 3301-3311. These Acts serve to 
fund two major social initiatives that were enacted as part of the 
Social Security Act, ch. 531, 49 Stat. 620 (1935), as amended, 42 
U.S.C. 301-1397jj. See generally, W. Cohen, The Development of 
the Social Security Act of 1935: Reflections Some Fifty Years 
Later, 6 Soc. Sec. Rep. Ser. 933, 933-934 (1984). The FICA tax 
funds the Federal Old Age, Survivors, Disability and Hospital 
Insurance Programs, commonly known as Social Security and 

12 

and (b) of the Internal Revenue Code impose the FICA 
taxes that fund Social Security and Medicare on “wages 

* * * paid” during the calendar year and Section 
3301(a) imposes the FUTA tax on “wages * * * paid 

* * * during the calendar year.” No exception to this 
express statutory rule is created for back wages. 
Under the plain language of these statutes, back wages 
are taxed in the year in which they are paid and not in 
the year in which the services were performed or would 
have been performed but for the wrongful conduct of 
the employer. The extensive legislative history of 
these provisions, and the consistent rulings and regula- 
tions of the Treasury, confirm that, under the plain text 
of these statutes, back wages must be attributed for 
FICA and FUTA purposes to the year in which the 
wages are actually paid. 

Medicare. The FUTA tax funds a federal-state unemployment 
compensation program. Ibid. 

The amount of wages that are subject to the FICA and FUTA 
taxes for a particular year are limited by statute. See 26 U.S.C. 
3121(a)(1) (providing an annual ceiling on the “wages” subject to 
tax under Sections 3111(a) and 3101(a)); 26 U.S.C. 3306(b)(1) 
(providing an annual ceiling on the “wages” that are subject to tax 
under 26 U.S.C. 3301). The amount of wages subject to the FICA 
Medicare taxes imposed by 26 U.S.C. 3101(b) and 3111(b) was also 
limited for the years 1986 and 1987 (26 U.S.C. 3121(a)(1) (1982)), 
but there was no limit on the amount of “wages” used in computing 
the Medicare tax for 1994. 26 U.S.C. 3121(a)(1). The applicable 
rates of tax can also vary from year to year. See 26 U.S.C. 3101, 
3111, 3301. Determining the proper year in which to attribute 
“wages” for FICA and FUTA tax purposes thus often has mean- 
ingful tax consequences. 

13 

1. The FICA Provisions 

a. Section 3101(a) of the Internal Revenue Code 
imposes the FICA tax on the wages received by an 
employee during the calendar year. It states (26 U.S.C. 
3101(a) (emphasis added)): 

In addition to other taxes, there is hereby imposed 
on the income of every individual a tax equal to the 
following percentages of the wages (as defined in 
section 3121(a)) received by him with respect to 
employment (as defined in section 3121(b))— 

In cases of wages received during: 
The rate shall be: 

1984, 1985, 1986, or 1987 
5.7 percent 

1988 or 1989 

6.06 percent 

1990 or thereafter 

6.2 percent. 

Section 3111(a) similarly imposes the FICA tax on the 
wages paid by employers during the calendar year. It 
states (26 U.S.C. 3111(a) (emphasis added)): 

there is hereby imposed on every employer an excise 
tax, with respect to having individuals in his employ, 
equal to the following percentages of the wages (as 
defined in section 3121(a)) paid by him with respect 
to employment (as defined in section 3121(b))— 

In cases of wages paid during: 
The rate shall be: 

1984, 1985, 1986, or 1987 
5.7 percent 

1988 or 1989 

6.06 percent 

1990 or thereafter 
6.2 percent. 

The provisions that impose the employee and employer 
Medicare taxes (26 U.S.C. 3101(b), 3111(b)) are simi- 
larly worded and also apply to “wages received during” 
and “wages paid during” the relevant tax year. In 

14 

addition, pursuant to 26 U.S.C. 3102(a), the employer is 
to deduct the employee’s portion of the FICA tax “from 
the wages as and when paid.” Under the plain text of 
these provisions, (i) the FICA tax is determined by 
applying the rate in effect during the year to the wages 
paid or received during that year and (ii) the amount of 
tax thus determined is to be deducted from the 
employee’s wages in the year the wages are paid. 

Section 3121(a)(1) imposes the annual ceiling on the 
amount of wages to which the FICA tax applies. That 
ceiling also explicitly applies to the year that the wages 
are paid and not to the year of employment. It specifies 
that “wages” for purposes of 26 U.S.C. 3101(a) and 
3111(a) do not include (26 U.S.C. 3121(a)(1) (emphasis 
added)):6 

that part of the remuneration which, after remu- 
neration (other than remuneration referred to in the 
succeeding paragraphs of this subsection) equal to 
the contribution and benefit base (as determined 
under section 230 of the Social Security Act) with 
respect to employment has been paid to an indivi- 
dual by an employer during the calendar year with 
respect to which such contribution and benefit base 
is effective, is paid to such individual by such 
employer during such calendar year. 

b. The legislative history of these FICA provisions 
shows that Congress specifically intended wages to be 
taken into account in the year that they are paid, 
regardless of when earned or when owed by the em- 
ployer. As originally enacted in 1935, the Social 
Security Act provided that FICA tax rates, which 

6 Similarly, 26 U.S.C. 6413(c)(1) provides a credit for excess 
FICA taxes paid on the “wages received” by an employee. 

15 

gradually increased over the period from 1937 through 
1948, applied “with respect to employment during the 
calendar year[].” Social Security Act of 1935, ch. 531, 
§§ 801, 804, 49 Stat. 636-637. Interpreting this language 
from the 1935 Act, the original Treasury regulations 
specified that “[t]he employees’ tax is computed by 
applying to the wages received by the employee the 
rate in effect at the time of the performance of the 
services for which the wages were received” (Treas. 
Reg. 91, Art. 202 (1936) (emphasis added)) and that 
“[t]he employers’ tax is computed by applying to the 
wages paid by the employer the rate in effect at the time 
of the performance of the services for which the wages 
were paid” (Treas. Reg. 91, Art. 302 (1936) (emphasis 
added)). 

In 1939, however, Congress amended FICA ex- 
pressly to provide that the tax would no longer be ap- 
plied on the basis of when the services were performed 
but would instead be applied “[w]ith respect to wages 
received during the calendar year[]” in the case of the 
employee and “[w]ith respect to wages paid during the 
calendar year[]” in the case of the employer. Social 
Security Act Amendments of 1939, ch. 666, §§ 601, 604, 
53 Stat. 1382-1383 (emphasis added). The Report of the 
Committee on Ways and Means explained this change 
as follows: 

A further change is made by this amendment. 
Sections 1400 and 1410 of the Internal Revenue 
Code [the predecessors of 26 U.S.C. 3101 and 3111] 
now provide that the rate of tax applicable to wages 
is the rate in effect at the time of the performance of 
the services for which the wages are paid. This will 
unnecessarily complicate the making of returns and 
the collection of the taxes in later years when the 

16 

rate of tax has been increased. For example, in 1943 
the rate of tax increases from 1 percent to 2 percent. 
Thus, wages which are paid in 1943 for services 
performed in 1942 will be subject to the 1-percent 
rate, while wages paid in 1943 for services 
performed in that year will be subject to the 2- 
percent rate. Provision must therefore be made in 
the return for 1943 for the reporting of wages 
subject to the different rates, and, in auditing the 
returns, it will be necessary to ascertain not merely 
the time when the wages were paid and received, 
but also the year of the rendition of the services for 
which the wages are paid. If employers have failed 
to make the proper distinction, many refunds and 
additional assessments will doubtless be necessary 
and confusion will result. Under the amendment the 
rate applicable would be the rate in effect at the time 
that the wages are paid and received without 
reference to the rate which was in effect at the time 
the services were performed. 

H.R. Rep. No. 728, 76th Cong., 1st Sess. 57-58 (1939) 
(emphasis added). See also S. Rep. No. 734, 76th Cong., 
1st Sess. 70-71 (1939).7 

The legislative history of the parallel changes in the 
provisions that establish the annual ceiling on wages 
subject to the FICA tax (currently in 26 U.S.C. 

7 In enacting this new rule, Congress emphasized that, “[w]ith 
both the old-age-insurance tax [FICA] and the unemployment- 
compensation tax [FUTA] on the wages paid basis, the keeping of 
records by employers will be simplified.” S. Rep. No. 734, supra, 
at 76; H.R. Rep. No. 728, supra, at 62-63. Following enactment of 
these amendments, the relevant Treasury Regulations were re- 
written to reflect this change in the statute. See Treas. Reg. 106 
§§ 402.302, 402.402 (1940); page 19 & note 10, infra. 

17 

3121(a)(1)) also reflects the clear intent of Congress 
that the FICA taxes are to be determined on a wages- 
paid basis.8 As originally enacted in 1935, the Social 
Security Act allocated wages to the year in which 
services were performed in applying the annual FICA 
tax wage ceiling. Social Security Act of 1935, ch. 531, 
§ 811(a), 49 Stat. 639. In 1946, Congress amended that 
annual ceiling provision to change the basis upon which 
the ceiling is measured from services performed during 
the year to wages paid during the year.9 Social 
Security Act Amendments of 1946, ch. 951, § 412(a), 60 
Stat. 989. The reports of the Senate Finance Committee 
and the House Committee on Ways and Means 
explained that, “[u]nder the definition of the term 
contained in existing law there is excluded from 
‘wages’, for [FICA and FUTA tax] purposes, all 
remuneration with respect to employment during any 
calendar year paid to an individual by an employer 
(irrespective of the year of payment) after 

8 When Congress has determined that a particular type of 
wages should be excepted from the general rule that attributes 
them to the year in which they are paid or received, it has done so 
by special rule. Congress created a special timing rule for compen- 
sation attributable to certain nonqualified deferred compensation 
plans in 26 U.S.C. 3121(v)(2) and 3306(r)(2). Under that special 
rule, this specific type of compensation is “ taken into account for 
purposes of this chapter as of the later of * * * when the services 
are performed, or * * * when there is no substantial risk of 
forfeiture of the rights to such amount.” 26 U.S.C. 3121(v)(2). No 
similar special timing rule for “back wages” has been enacted by 
Congress. 

9 Subsequent to the enactment of the Social Security Act of 
1935, Congress enacted the Internal Revenue Code of 1939 and 
incorporated the FICA tax provisions in it. The annual wage 
ceiling provision was designated as Code Section 1426(a)(1). 
26 U.S.C. 1426(a)(1) (1940). 

18 

remuneration equal to $3,000 has been paid to such 
individual by such employer with respect to employ- 
ment during such year.” S. Rep. No. 1862, 79th Cong., 
2d Sess. 35 (1946); H.R. Rep. No. 2447, 79th Cong., 2d 
Sess. 35 (1946). These reports explained that the new 
legislation “amends such definitions, effective January 
1, 1947, to constitute as the yardstick the amount paid 
during the calendar year (with respect to employment 
to which the taxes under the code are applicable), 
without regard to the year in which the employment 
occurred.” S. Rep. No. 1862, supra, at 35 (emphasis 
added); H.R. Rep. No. 2447, supra, at 35 (emphasis 
added). These reports concluded that, “in applying the 
$3,000 limitation on wages, the employer, employee, and 
those administering the taxes, may, beginning with the 
calendar year 1947, look only to the amount of remu- 
neration paid by the employer to the employee during 
the calendar year, and exclude all remuneration paid 
during the calendar year after $3,000 has been paid 
during the year with respect to * * * the employment 
with respect to which the taxes imposed by * * * the 
Federal Insurance Contributions Act are applicable[].” 
S. Rep. No. 1862, supra, at 36 (emphasis added); H.R. 
Rep. No. 2447, supra, at 35 (emphasis added). 

After these various amendments were enacted in 
1939 and 1946, the FICA and FUTA tax provisions 
were recodified in the Internal Revenue Code of 1954 
and given their current section numbers. “No substan- 
tive changes,” however, were made in these provisions. 
H.R. Rep. No. 1337, 83d Cong., 2d Sess. A324 (1954); 
S. Rep. No. 1622, 83d Cong., 2d Sess. 482 (1954). 
Although the applicable tax rates and the amounts of 
the annual wage ceilings have scaled upward since the 
enactment of the 1954 Code, the FICA and FUTA pro- 
visions involved in this case have remained sub- 

19 

stantially the same since 1946. See 26 U.S.C. 3101, 
3111, 3121(a). 

c. In accordance with the language of the amended 
statutes and their legislative history, Treasury regula- 
tions have consistently specified that the relevant year 
for determining the FICA tax is the year in which the 
wages are paid or received. 

10 These regulations ex- 
pressly provide that “[t]he employee tax attaches at the 
time that the wages are received by the employee” (26 
C.F.R. 31.3101-3) and that “[t]he employee tax is 
computed by applying to the wages received by the 
employee the rate in effect at the time such wages are 
received” rather than during “the year in which the 
services were performed” (26 C.F.R. 31.3101-2(c) & 
Example). The regulations further specify that “[t]he 
employer tax attaches at the time that the wages are 
paid by the employer” (26 C.F.R. 31.3111-3) and that 
“[t]he employer tax is computed by applying to the 
wages paid by the employer the rate in effect at the 
time such wages are paid” (26 C.F.R. 31.3111-2(c)). 

11 

The regulations that interpret the statutory annual 

10 In 1960, the Treasury Regulations governing FICA and 
FUTA were consolidated and republished with their current sec- 
tion numbers. T.D. 6516, 25 Fed. Reg. 13,032 (Dec. 20, 1960). The 
substance of these regulations traces back to earlier promulga- 
tions. See Treas. Reg. 107 (as amended by T.D. 5566, 1947-2 C.B. 
148); Treas. Reg. 106 (as amended by T.D. 5566, 1947-2 C.B. 148); 
Treas. Reg. 106 (1940), §§ 402.301, 402.302, 402.303, 402.401, 
402.402, 402.403. 

11 These regulations further provide that, “[i]n general, wages 
are received by an employee at the time that they are paid by the 
employer to the employee. Wages are paid by an employer at the 
time that they are actually or constructively paid unless under 
paragraph (c) of this section [which concerns specified types of 
minor cash payments that are not involved in this case] they are 
deemed to be subsequently paid.” 26 C.F.R. 31.3121(a)-2(a). 

20 

ceiling on the amount of wages subject to the FICA tax 
(26 U.S.C. 3121(a)(1) further provide that this limitation 
“relates to the amount of remuneration received dur- 
ing any 1 calendar year for employment after 1946 and 
not to the amount of remuneration for employment per- 
formed in any 1 calendar year.” 26 C.F.R. 31.3121(a)(1)- 
1(a)(2) (emphasis added). In numerous Revenue 
Rulings that have been issued to apply these statutes 
and regulations in specific contexts, the Treasury has 
consistently concluded that back wages are to be taken 
into account for FICA purposes in the year that they 
are actually paid, regardless of when earned or owed. 
Rev. Rul. 55-203, 1955-1 C.B. 114, 115; Rev. Rul. 89-35, 
1989-1 C.B. 280; see also Rev. Rul. 78-336, 1978-2 C.B. 
255; Rev. Rul. 1957-92, 1957-1 C.B. 306, 307. 

It is well established that “Treasury regulations and 
interpretations long continued without substantial 
change, applying to unamended or substantially reen- 
acted statutes, are deemed to have received congres- 
sional approval and have the effect of law.” Cottage 
Sav. Ass’n v. Commissioner, 499 U.S. 561 (1991) (inter- 
nal quotation marks and citations omitted); see also 
Atlantic Mutual Ins. Co. v. Commissioner, 523 U.S. 
382, 389 (1998). This Court has made clear that “[t]he 
role of the judiciary in cases of this sort begins and ends 
with assuring that the Commissioner’s regulations fall 
within his authority to implement the congressional 
mandate in some reasonable manner.” United States v. 
Correll, 389 U.S. 299, 307 (1967). See also National 
Muffler Dealers Ass’n v. United States, 440 U.S. 472, 
477 (1979). “Because the rule challenged here has not 
been shown deficient on that score, the Court of 
Appeals should have sustained its validity.” United 
States v. Correll, 389 U.S. at 307. 

21 

2. The FUTA Provisions 

a. The text, history, and administrative interpreta- 
tion of the FUTA tax provisions parallels that of the 
FICA provisions just described. Section 3301 of the 
Internal Revenue Code imposes the FUTA tax on the 
wages paid by an employer during the calendar year. It 
states (26 U.S.C. 3301 (emphasis added)): 

There is hereby imposed on every employer (as 
defined in section 3306(a)) for each calendar year an 
excise tax, with respect to having individuals in his 
employ, equal to— 

(1) 6.2 percent in the case of calendar years 
1988 through 2007; or 

(2) 6.0 percent in the case of calendar year 2008 
and each calendar year thereafter; 

of the total wages (as defined in section 3306(b)) 
paid by him during the calendar year with respect 
to employment (as defined in section 3306(c)). 

Section 3306(b)(1) imposes the annual ceiling on the 
amount of wages to which the FUTA tax applies. That 
ceiling also explicitly applies to the year that the wages 
are paid and not to the year of employment. It specifies 
that “wages” for purposes of 26 U.S.C. 3301 do not 
include (26 U.S.C. 3306(b)(1) (emphasis added)): 

that part of the remuneration which, after remu- 
neration (other than remuneration referred to in the 
succeeding paragraphs of this subsection) equal to 
$7,000 with respect to employment has been paid to 
an individual by an employer during any calendar 
year, is paid to such individual by such employer 
during such calendar year. 

22 

Thus, as with the FICA provisions, the plain language 
of the FUTA provisions imposes the tax in the year in 
which the wages are paid or received, and does not 
allocate wages to the year in which the services gen- 
erating the wages were performed. 

b. The legislative history of the FUTA provisions 
also demonstrates that Congress expressly intended 
wages to be taken into account in the year that they are 
paid, regardless of when earned or when owed by the 
employer. As originally enacted in 1935, the Social 
Security Act provided that FUTA tax rates, which 
gradually increased from 1 percent to 3 percent over 
the period from 1936 through 1938, applied “[w]ith 
respect to employment during the calendar year.” 
Social Security Act, ch. 531, § 901, 49 Stat. 639. In 1939, 
however, Congress amended the FUTA tax provisions 
(in the same manner that it amended the FICA 
provisions) to provide that the rate of tax would no 
longer be applied with respect to “employment during 
the calendar year” but would instead be applied to 
“wages * * * paid by [an employer] during the 
calendar year * * * .” Social Security Act 
Amendments of 1939, ch. 666, § 608, 53 Stat. 1387. The 
reports of the Senate Finance Committee and the 
House Committee on Ways and Means explained that 
this 1939 amendment was adopted to make the FUTA 
tax applicable to “wages paid” rather than “wages 
payable” and thus paralleled the change made at the 
same time to the FICA tax which, under the 1939 
amendments, “also imposes a tax on ‘wages paid.’ ” 

S. 
Rep. No. 734, supra, at 75; H.R. Rep. No. 728, supra, at 

62. These reports explain that (S. Rep. No. 734, supra, 
at 75-76 (emphasis added)): 

23 

Under the existing law wages are “payable” with 
respect to employment during a calendar year, even 
though the amount of wages is not fixed and no 
right exists to enforce payment at any time during 
that year. Thus a bonus paid in 1939 for services 
performed in 1938 constitutes “wages payable” for 
1938, even though the amount of the bonus may not 
have been known in 1938 and no obligation to pay it 
existed in that year. 

In cases in which remuneration for services of an 
employee in a particular year is based on a per- 
centage of profits, or on future royalties, the amount 
of which cannot be determined until long after the 
close of the year, the employer has been required to 
estimate unascertained amounts and pay taxes and 
contributions on that basis. If he has overestimated, 
subsequent corrections on the return must be made 
with consequent refunds. If the employer has 
underestimated, additional taxes may become due 
and he may also be compelled to pay additional 
State contributions, which are usually not allowable 
as credit because not timely paid. The attendant 
difficulties and confusion cause a burden on em- 
ployers and administrative authorities alike. The 
placing of this tax on the “wages paid” basis will 
relieve this situation. 

With both the old-age-insurance tax [FICA] and 
the unemployment-compensation tax [FUTA] on 
the wages paid basis, the keeping of records by 
employers will be simplified. 

The legislative history of the wage ceiling that 
applies to the FUTA tax (currently codified at 26 
U.S.C. 3306(b)(1)) further confirms that this tax is to be 

24 

calculated and determined on a wages-paid basis. As 
originally enacted in 1935, the Social Security Act 
placed no ceiling on the wages subject to this tax. 
Social Security Act of 1935, ch. 531, §§ 901, 907(b), 49 
Stat. 639-642. In 1939, however, Congress amended the 
definition of wages for FUTA purposes to impose an 
annual ceiling that tracked the annual wage ceiling 
applicable under the FICA—which at that time meas- 
ured the ceiling by the wages for services performed in 
the calendar year. See page 17, supra. When Congress 
amended the annual wage ceiling on the FICA tax in 
1946 to place it on a wages-paid basis (see ibid.), Con- 
gress made a parallel amendment to the FUTA wage 
ceiling “to effect a corresponding change.” S. Rep. No. 
1862, supra, at 36; H.R. Rep. No. 2447, supra, at 35; see 
Social Security Act Amendments of 1946, ch. 951, 
§ 412(b), 60 Stat. 989 (amending the FUTA wage 
ceiling). 

c. The Treasury regulations interpreting FUTA 
have long specified that this tax is to be determined by 
allocating wages to the year in which they are paid, 
regardless when those wages were earned or were 
owed by the employer. These regulations specify that 
“[t]he tax for any calendar year is measured by the 
amount of wages paid by the employer during such 
year” (26 C.F.R. 31.3301-2) and that “[t]he tax is 
computed by applying to the wages paid in a calendar 
year * * * the rate in effect at the time the wages are 
paid” (26 C.F.R. 31.3301-3(b)). The regulations that 
interpret the statutory annual ceiling on wages subject 
to FUTA (26 U.S.C. 3306(b)(1)) also expressly provide 
that the ceiling applies “to the amount of remuneration 
paid during any one calendar year for employment 
after 1938, and not to the amount of remuneration for 
employment performed in any one calendar year.” 

25 

26 C.F.R. 31.3306(b)(1)-1(a)(2) (emphasis added). 

12 

Because these regulations conform to the plain text and 
history of these statutes, and thus undoubtedly “imple- 
ment the congressional mandate in some reasonable 
manner,” the agency’s interpretation should have been 
sustained by the court of appeals. United States v. 
Correll, 389 U.S. at 307. 

B. The Bowman Case, On Which The Court Of Appeals 

Based Its Decision, Was Wrongly Decided 

In the present case, the court of appeals did not 
consider or address the agency’s consistent interpreta- 
tion of these controlling statutory provisions. Nor did 
the court provide any analysis or discussion of the text 
of the statutes or their legislative history. Instead, the 
Sixth Circuit rejected the government’s position solely 
on the basis of that court’s prior decision in Bowman. 
Pet. App. 5a. In Bowman, however, the court had also 
failed to address the clear statutory text and legislative 
history that demonstrates that, after 1946, Congress 
did not intend to allocate wages to the year in which 
services were performed. The court in Bowman also 
failed to address or consider the deference due to the 

12 These regulations state that, in applying the annual ceiling, 
“the term ‘wages’ does not include that part of the remuneration 
paid within any calendar year by an employer to an employee 
which exceeds the first $3,000 of remuneration * * * paid within 
such calendar year by such employer to such employee for employ- 
ment performed for him at any time after 1938.” 26 C.F.R. 

31.3306(b)(1)-1(a)(1). Since these regulations were issued, the 
annual wage ceiling has been raised by statute to $7,000. See Tax 
Equity and Fiscal Responsibility Act of 1982, Pub. L. No. 97-248, § 
271(a), 96 Stat. 554; Unemployment Compensation Amendments of 
1976, Pub. L. No. 94-566, § 211(a), 90 Stat. 2676; Employment 
Security Amendments of 1970, Pub. L. No. 91-373, § 302, 84 Stat. 
713. 

26 

interpretation of these statutes set forth in the con- 
sistent and longstanding Treasury regulations. In- 
stead, in Bowman, the court of appeals based its 
holding that back wages are to be allocated to the years 
in which services were performed, rather than to the 
year in which the back wages were paid, solely on the 
theory that that result is required by the decision of 
this Court in Social Security Board v. Nierotko, 327 
U.S. 358 (1946). See 824 F.2d at 530. The decision in 
Nierotko, however, does not support the erroneous 
holding of the court of appeals. 

1. The Nierotko case involved an application of the 
Social Security Act provisions that predated the 
changes made to these statutes by Congress in 1946. In 
Nierotko, an employee was awarded “back pay” under 
the National Labor Relations Act for the period from 
February 2, 1937, to September 25, 1939, for being 
wrongfully discharged due to his union activities. The 
back pay was paid on July 18, 1941. The principal issue 
for decision was whether that back pay was to be 
treated as “wages” in determining the employee’s 
entitlement to benefits under the Social Security Act of 
1935. 

13 The Court first concluded that back pay con- 
stitutes “wages” for purposes of the Act. 327 U.S. at 
360-370. The Court then stated that, “[i]f, as we have 
held above, ‘back pay’ is to be treated as wages, we 
have no doubt that it should be allocated to the periods 

13 The definition of “wages” for benefit purposes that was at 
issue in Nierotko appeared in Title II of the Social Security Act of 
1935. Social Security Act of 1935, ch. 531, § 210(a), 49 Stat. 625. 
This provision mirrored the definition of “wages” for Social Secu- 
rity tax purposes which appeared in Title VIII of the 1935 Act. 
Social Security Act of 1935, ch. 531, § 811(a), 49 Stat. 639. 

27 

when the regular wages were not paid as usual.” Id. at 
370. 

The Nierotko case was decided under the original 
provisions of the Social Security Act of 1935 that de- 
fined “wages” as “remuneration for employment,” sub- 
ject to a $3,000 wage ceiling “with respect to employ- 
ment during any calendar year.” 

14 Social Security Act, 
ch. 531, § 210(a), 49 Stat. 625. See 327 U.S. at 360. The 
term “employment” was further defined in that Act as 
“any service * * * performed * * * by an employee 
for his employer.” Social Security Act, ch. 531, § 210(b), 
49 Stat. 625. The statute applied in Nierotko thus used 
services performed, rather than payments received, to 
define the annual wage ceiling for benefit purposes. 
See page 17, supra. 

In 1946, Congress amended the Social Security Act to 
change the annual “wage” ceiling for the FICA and 
FUTA tax provisions and for benefit purposes as well. 
Under the new statute, for “remuneration * * * with 
respect to employment * * * paid to an individual 
during any calendar year after 1946,” the annual ceiling 
was based upon “remuneration * * * paid to such 
individual during such calendar year.” Social Security 
Act Amendments of 1946, ch. 951, § 414(a)(3), 60 Stat. 
991 (emphasis added). The legislative reports for the 
1946 Act plainly state that the annual wage ceiling for 
benefit computation purposes (and for FICA and 
FUTA tax purposes) was thereafter to be determined 
based upon the date of the wage payment and “without 

14 The Court expressly held that Title II of the Social Security 
Act, ch. 531, 49 Stat. 622, and not Title II of the Social Security Act 
Amendments of 1939, ch. 666, 53 Stat. 1362 (42 U.S.C. 401 et seq.), 
effective January 1, 1940, governed the benefit issues before it. 
370 U.S. at 360. 

28 

regard to the year in which the employment occurred.” 
S. Rep. No. 1862, supra, at 35; H.R. Rep. No. 2447, 
supra, at 35. See also page 18, supra. The statutory 
scheme considered in Nierotko thus obviously differed 
in this precise critical respect from the statutory 
provisions that have been in effect since 1946—the 
provisions that are involved in this case. 

15 

2. Moreover, as the Sixth Circuit acknowledged in 
the Bowman case, the decision in Nierotko “is factually 
distinguishable from the present case” because it “in- 
volved back wages in the benefits context as opposed to 
the taxation context.” 824 F.2d at 530; see also Mazur 

v. Commissioner, 986 F. Supp. 752, 755-756 (W.D.N.Y. 
1997). The considerations relevant for benefit purposes 
are not necessarily the same as those for tax purposes. 
As this Court observed in Flemming v. Nestor, 363 
U.S. 603, 609 (1960), “eligibility for benefits, and the 
amount of such benefits, do not in any true sense 
depend on contribution to the program through the 

15 In a program policy statement, the Social Security Admini- 
stration (SSA) has indicated that, for benefit computation pur- 
poses, it will continue to apply the Nierotko rule to one particular 
type of back wages—“back pay under a statute.” SSA, Dep’t of 
Health & Human Servs., SSR 83-7, 1981-1991 Soc. Sec. Rep. Ser. 
18 (1983); see also 20 C.F.R. 404.1242(b). This policy statement 
applies only for benefit computation purposes; it does not apply for 
tax purposes. SSA, Dep’t of Health & Human Servs., Reporting 
Back Pay and Special Wage Payments to the Soc. Sec. Admin., 
Pub. No. 957 (Sept. 1997), at 1 (“The Social Security Ad- 
ministration (SSA) has special rules for back pay * * * for social 
security coverage and benefit purposes only.”). Indeed, the SSA 
has noted that, under the rule that applies for tax purposes under 
the Social Security Act, “employers are liable for Federal 
Insurance Contributions Act tax payments on back pay on the 
basis of when the payment is made * * *.” SSR 83-7, supra, at 19. 
Accord, Pub. No. 957, supra, at 2. 

29 

payment of taxes, but rather on the earnings record of 
the primary beneficiary.” See also Walker v. United 
States, 202 F.3d 1290, 1293 (10th Cir. 2000) (“The Social 
Security Administration is a different agency, imple- 
menting a different statutory scheme.”); note 15, supra. 
In determining an employee’s eligibility for benefits, 
and the amount thereof, an allocation of an award of 
back wages to the periods of employment to which such 
back wages relate may be consistent with the policy of 
providing security to employees in retirement. Absent 
such an allocation, an employee may not obtain credit 
for a sufficient number of quarters to allow him to 
collect benefits and the amount of benefits awarded 
may similarly be affected. 

No similar policy considerations are at stake in the 
tax context. Indeed, taxing back wages in the year 
actually paid does not routinely result in additional 
FICA and FUTA tax liability, even though it appears 
to do so in this particular case. To the contrary, in the 
common situation in which, during the year of payment 
(as opposed to the year to which such back wages could 
be attributed), the employee had already reached the 
maximum wage limit, less tax would be owed when the 
back wages are taxed in the year paid. As one com- 
mentator has pointed out, “[t]he Bowman case will sel- 
dom provide an advantageous result for current 
[taxpayers].” K. Gideon, Lawsuits and Settlements 
§ 1101.4, at 262 (1995). Instead, it is “expensive for 
most taxpayers.” Id. at 263 n.42. 

Moreover, because of the complexities of restating 
tax liabilities for cash-basis taxpayers from the year of 
payment to former periods of time, the rule adopted in 
Bowman would “impose[] substantial administrative 
burdens” both on taxpayers and on the IRS. K. Gideon, 
supra, at 263 n.42. In particular, imposing these taxes 

30 

in the year the services were performed, rather than 
the year the wages were paid, would destroy symmetry 
between the collection of income taxes and FICA taxes 
on wages. Under the federal income tax (26 U.S.C. 1), 
“payments of compensation are income to a taxpayer on 
a cash basis in the year of receipt, as distinguished from 
the year in which the compensation is earned.” In re 
Freedomland, Inc., 480 F.2d 184 (2d Cir. 1973), aff ’d 
sub nom. Otte v. United States, 419 U.S. 43 (1974). An 
employee who receives an award of back wages is, for 
purposes of the income tax, to include those wages in 
the year in which they are paid. The employer is also to 
withhold the resulting income taxes in that year. 
Under the rule adopted in the Bowman case, however, 
the employer would be required to withhold Social 
Security and Medicare taxes in the year the services 
were performed rather than in the year the wages were 
actually paid. The existence of two inconsistent with- 
holding requirements for income and FICA taxes owed 
on the same wages would obviously create “difficulties 
and confusion” for “employers and administrative 
authorities alike.” S. Rep. No. 734 , supra, at 76; H.R. 
Rep. No. 728, supra, at 62. It was expressly to 
“relieve” such “difficulties and confusion” that Congress 
amended these statutes in 1939 to place the FUTA and 
FICA taxes “on the ‘wages paid’ basis.” S. Rep. No. 
734, supra, at 75; H.R. Rep. No. 728, supra, at 63. 

16 See 

pages 18, 23, supra. 

16 The Internal Revenue Code contemplates that there will be 
some common administration of the income tax and the employ- 
ment tax. For example, if an employee receives wages from more 
than one employer, the wages on which the employee pays FICA 
taxes through withholding by his employers may exceed the con- 
tribution and benefit base for a particular year (i.e., the annual 
wage ceiling). Under 26 U.S.C. 6413(c)(1), the employee would 

31 

3. The suggestion in Bowman that the rule applied 
in Nierotko for benefit purposes under the pre-1946 
statutory scheme governs this post-1946 tax case is 
contradicted by this Court’s decision in Otte v. United 
States, 419 U.S. 43 (1974), aff ’g In re Freedomland, 
Inc., 480 F.2d 184 (2d Cir. 1973). In Otte, former 
employees of a bankrupt corporation filed wage claims 
for services performed prior to the filing of the 
bankruptcy petition. The district court held that the 
bankruptcy trustee was required to withhold federal 
income and employment taxes with respect to such 
claims. 419 U.S. at 46. The district court also held that 
the government was not required to file a proof of claim 
to recover the withheld taxes and that the government 
claim should be given fourth priority. Id. at 46-47. The 
court of appeals affirmed these holdings and rejected 
the trustee’s assertion that requiring the trustee to 
withhold taxes would create an administrative “parade 
of horribles.” 480 F.2d at 188. The court of appeals 
pointed out that most wage earners are on a cash basis 
and report their income taxes when their wages are 
received and that the “[w]ithholding of social security 
taxes is also done ‘by deducting the amount of the tax 
from the wages as and when paid.’ ” 

Id. at 189 n.8 
(quoting 26 U.S.C. 3102(a)). The court further noted 
that “[t]he taxes are by law calculable only when the 
wage claims are paid and not until then.” Id. at 190. 
The court of appeals thus recognized that back pay is 
taken into account for FICA tax purposes in the year 

ordinarily receive a credit or refund of the tax to the extent that 
the tax exceeds the tax computed on the amount of a single annual 
wage ceiling. This credit or refund, however, is “subject to the 
provisions of section 31(b).” 26 U.S.C. 6413(c)(1). And, under 26 
U.S.C. 31(b), the Secretary of the Treasury is authorized to apply 
an employment tax credit against the employee’s income tax. 

32 

the payment is received, rather than the year for which 
the payment was owed. 

This Court affirmed. 419 U.S. at 58. The Court first 
concluded that, although “the payments to the wage 
claimants who filed in this case [were] * * * made 
after the employment relationship terminated,” they 
were still “wages” for purposes of income tax with- 
holding and that “the situation is the same with respect 
to FICA withholding.” Id. at 49, 51. The Court then 
observed that “Section 3102(a) of the Internal Revenue 
Code, 26 U.S.C. § 3102(a), provides that the tax is to be 
collected by the employer by deducting ‘from the wages 
as and when paid.’ ” 419 U.S. at 51. The Court there- 
fore concluded that “the payments clearly are ‘wages’ 
under that statute, even though again, at the time of 
payment, the employment relationship between the 
bankrupt and the claimant no longer exists.” Ibid. The 
Court stated that this conclusion was also supported by 
the longstanding regulations that “consistently have 
been to this effect.” Ibid. The Court emphasized that 
the payments became subject to FICA tax when paid, 
rather than when earned, for “[l]iability for the taxes 
accrues only when the wage is paid.” Id. at 55 (citing 26 
U.S.C. 3402(a) and 3101(a)). The Court explained that 
“[t]he wages that are the subject of the wage claims, 
although earned before bankruptcy, were not paid prior 
to bankruptcy. Freedomland [the debtor] had incurred 
no liability for the taxes. Liability came into being only 
during bankruptcy. The taxes do not partake, there- 
fore, of the nature of debts of the bankrupt for which 
proofs of claim must be filed.” 419 U.S. at 55. In Otte, 
the Court thus expressly concluded that, under the 
plain text of these statutes, FICA tax liability arises at 
the time that the back wages are paid, rather than at 

33 

the time the work to which the wage claim relates is 
performed. 

4. The reasoning of the court of appeals in Bowman 
has been expressly rejected by the two courts of 
appeals that have considered it. 

17 In Hemelt v. United 
States, 122 F.3d 204 (4th Cir. 1997), the taxpayers had 
received a payment in settlement of a class action suit 
brought under Section 502 of the Employee Retirement 
Income Security Act of 1974, Pub. L. No. 93-406, 88 
Stat. 891. The ERISA suit had alleged that the tax- 
payers’ employer had improperly fired them to prevent 
them from qualifying for pension benefits. The tax- 
payers contended that the settlement payment did not 
represent “wages” subject to the FICA tax and further 
contended, relying on the Sixth Circuit’s decision in 
Bowman (Appellant’s Br. 46), that, even if the payment 
constituted “wages,” it must be allocated to the years 
the wages would have been earned (but for the im- 
proper termination) instead of to the year the payment 
was received. 122 F.3d at 210. The Fourth Circuit first 
concluded that the settlement payment represented 
back pay for a wrongful termination of employment and 

17 In Johnston v. Harris County Flood Control District, 869 
F.2d 1565 (1989), the Fifth Circuit cited Bowman for the 
proposition that “[a]t least for purposes of FICA (Social Security) 
taxes, a plaintiff receiving a back pay award is liable for the taxes 
that would have accrued in the year the wages were due.” Id. at 
1580. The Johnston case, however, was not a tax case. The 
question whether the award would be subject to tax was relevant 
in that case only for the purpose of determining the proper amount 
of such an award. Ibid. For that purpose, the timing of the tax 
was not material. Instead, what was material was simply whether 
the backpay award would be taxable or “tax-free”—for only an 
“award that accounts for the plaintiff’s tax liability accurately 
reflects the amount that the plaintiff actually lost.” Ibid. 

34 

therefore constituted “wages” for purposes of the 
FICA tax. Id. at 209-210. The court then held that 
the taxpayer’s reliance on the Bowman decision was 
“meritless.” Id. at 210. Without discussing the Bow- 
man opinion directly, the court rejected the reasoning 
of that decision because “[i]t is clear under the Trea- 
sury Regulations that ‘wages’ are to be taxed for FICA 
purposes in the year in which they are received.” Ibid. 
(citing 26 C.F.R. 31.3121(a)- 2(a)). 

18 

In Walker v. United States, 202 F.3d 1290 (2000), the 
Tenth Circuit has also rejected the analysis and con- 
clusion of the Bowman decision. In that case, in the 
years 1992 through 1995, a lawyer received a portion of 
a contingency fee payment owed in connection with an 
antitrust lawsuit that had been filed in 1972 and settled 
in 1975. The lawyer paid Self-Employment Contribu- 
tions Act (SECA) taxes imposed by 26 U.S.C. 1401 on 
the amounts received. He then brought a refund suit, 
claiming that the amounts received during the years 
1992 through 1995 should be allocated to the years in 
which the services were performed (1971 through 1975). 
In urging that claim, he relied on the decision of this 
Court in Nierotko and the decision of the Sixth Circuit 
in Bowman. The Tenth Circuit found the decision in 
Nierotko “inapposite” and the decision in Bowman 
“unpersuasive,” 202 F.3d at 1293. The Tenth Circuit, 
like the Fourth Circuit in Hemelt, relied significantly on 
the fact that the governing Treasury Regulations 

18 The court of appeals noted in the Hemelt case that the tax- 
payers had provided no evidence of how the court should “allocate 
their awards among the years to which they [were] supposedly at- 
tributable” and that, as a consequence, the court “could not under- 
take such allocation even if [it] were allowed to do so.” 122 F.3d at 
210-211. 

35 

specify that wages are subject to tax when they are 
received, not when the services are rendered. Id. at 
1292-1293. 

5. The court of appeals thus erred in Bowman in 
failing to consider the plain language of the pertinent 
statutes, their legislative history, and the applicable 
Treasury Regulations—all of which establish that back 
wages are to be taken into account for FICA and 
FUTA tax purposes in the year actually paid, regard- 
less of when the services were performed. The court of 
appeals should have been guided by this Court’s 
decision in Otte, which applied the relevant statutory 
provisions, rather than this Court’s decision in 
Nierotko, which applied statutory provisions that no 
longer exist and which have been amended by the 
provisions that are controlling in this case. See pages 
31-33, supra. 

CONCLUSION 

The judgment of the court of appeals should be 
reversed. 

Respectfully submitted. 

SETH P. WAXMAN 

Solicitor General 

PAULA M. JUNGHANS 

Acting Assistant Attorney 

General 

LAWRENCE G. WALLACE 

Deputy Solicitor General 

KENT L. JONES 

Assistant to the Solicitor 

General 

KENNETH L. GREENE 
ROBERT W. METZLER 

Attorneys 

NOVEMBER 2000