200
OCTOBER TERM, 2000
Syllabus
certiorari to the united states court of appeals for the sixth circuit
No. 00-203. Argued February 27, 2001—Decided April 17, 2001
Under a grievance settlement agreement, respondent Cleveland Indians
Baseball Company (Company) owed 8 players backpay for wages due in 1986 and 14 players backpay for wages due in 1987. The Company paid the back wages in 1994. This case presents the question whether, under the Federal Insurance Contributions Act (FICA) and the Federal Unemployment Tax Act (FUTA), the back wages should be taxed by reference to the year they were actually paid (1994) or, instead, by reference to the years they should have been paid (1986 and 1987). Both tax rates and the amount of the wages subject to tax (the wage base) have risen over time. Consequently, allocating the 1994 payments back to 1986 and 1987 would generate no additional FICA or FUTA tax liability for the Company and its former employees, while treating the back wages as taxable in 1994 would subject both the Company and the employees to significant tax liability. The Company paid its share of employment taxes on the back wages according to 1994 tax rates and wage bases. After the Internal Revenue Service denied its claims for a refund of those payments, the Company initiated this action in District Court. The Company relied on Sixth Circuit precedent holding that a settlement for back wages should not be allocated to the period when the employer finally pays but to the periods when the wages were not paid as usual. The District Court, bound by that precedent, entered judgment for the Company and ordered the Government to refund FICA and FUTA taxes. The Sixth Circuit affirmed.
Held: Back wages are subject to FICA and FUTA taxes by reference to the year the wages are in fact paid. Pp. 208-220.
(a) The Internal Revenue Code imposes FICA and FUTA taxes "on every employer . . . equal to [a percentage of] wages . . . paid by him with respect to employment." 26 U. S. C. §§ 3111(a), 3111(b), 3301. The Social Security tax provision, § 3111(a), prescribes tax rates applicable to "wages paid during" each year from 1984 onward. The Medicare tax provision, § 3111(b)(6), sets the tax rate "with respect to wages paid after December 31, 1985." And the FUTA tax provision, § 3301, sets the rate as a percentage "in the case of calendar years 1988 through
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