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Ruling on an important tax question that has split the federal circuits, the 3rd U.S. Circuit Court of Appeals has ruled that the University of Pittsburgh’s early retirement payments to its formerly tenured professors are 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,” U.S. Circuit Judge Julio M. Fuentes wrote in the 24-page opinion in University of Pittsburgh v. United States. But 3rd Circuit Chief Judge Anthony J. Scirica dissented, saying he would have upheld a lower court’s ruling that awarded a refund of more than $2 million to the university. “Although the matter is not free from doubt, I would hold the payments were not wages because they were given primarily in exchange for the faculty members’ relinquishment of tenure, which is a property interest in continued employment,” Scirica wrote. Fuentes found that the issue had already resulted in a split in the circuits. The 6th Circuit held in its 2006 decision in Appoloni v. United States that early retirement payments made to public school teachers who relinquished their statutory tenure rights were wages under FICA. The 8th Circuit held in its 2001 decision in North Dakota State University v. United States that early retirement payments to faculty who were required to relinquish their tenure rights were not wages. Fuentes sided with the 6th Circuit, holding that the relinquishing of tenure in the University of Pittsburgh’s early retirement plan did not change the fact that the payments were analogous to severance pay and therefore qualified as taxable wages. “We conclude that the relinquishment of tenure rights � although a condition precedent to the payments � does not alter the plan payments’ character as compensation for services, and therefore as wages,” Fuentes wrote in an opinion joined by U.S. Circuit Judge Michael A. Chagares. 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.” And the eligibility requirements for both tenured and nontenured workers were based on the employee’s age and years of service, Fuentes noted. The language in the plan documents also revealed that the university viewed the payments as compensation for services, Fuentes said, by stating that an important motivation for the plans was to keep the university’s compensation package competitive with peer universities. Even if the university made the payments in part to secure relinquishment of tenure rights, Fuentes said, “their main purpose was to provide for employees’ early retirement. In this way, they were indistinguishable from severance payments, which are generally taxed as wages.” The university’s lawyer, Andrew K. Fletcher of Pepper Hamilton, argued that tenure at the university level differs from seniority rights in other workplaces. Although seniority is purely a matter of time on the job, he said, university tenure is granted on more than just years of service and requires proof that a professor has earned distinction that is deserving of academic freedom. Tenure also creates a new relationship, Fletcher said, in which the professor is granted rights and immunities. In his dissent, Scirica agreed with Fletcher, saying “the concept of tenure � more closely resembles a right established at the onset of a new relationship than the types of benefits at-will employees earn over time.” Scirica said he would hold that payments for relinquishing seniority rights are taxable wages, but that payments for giving up tenure are not. The reason, Scirica said, is that tenure “is more than a recognition of satisfactory work,” and the decision to grant tenure “depends on myriad qualitative factors and calls for an evaluation of each candidate’s capacity for research, teaching, and contributing to knowledge.” Scirica also suggested that he does not believe the circuits had split on the issue � until now. In the 6th Circuit’s Appoloni decision, Scirica said, the public school teachers obtained tenure automatically upon completion of a probationary period. By contrast, he said, in the University of Pittsburgh’s case, and in the 8th Circuit’s North Dakota State University decision, the tenure was not automatic. At the university level, Scirica said, “the rights of tenure, along with its purposes, show that it marks a new relationship between professor and university.” Once tenured, a professor may be terminated only for “cause” or “financial exigency,” and only after a hearing, and therefore entitles the professor to due process rights, Scirica noted. Tenure also serves several purposes, Scirica said, including the right to academic freedom. As a result, Scirica said he would have sided with the 8th Circuit and held that “the property rights faculty members relinquished here were not accrued through duration of satisfactory employment, but were instead granted at the beginning of the separate tenured relationship with the university, a beginning marked by the recognition of superior achievement.” When viewed that way, Scirica said, the early retirement payments “are more analogous to buyouts of unexpired contract rights than to severance payments or payments for the relinquishment of rights of at-will employees.” (Copies of the 24-page opinion in University of Pittsburgh v. United States, PICS No. 07-1734, are available from The Legal Intelligencer . Please refer to page 9 for ordering information.) �

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