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Ruling on Early Retirement Payments
By Gwendolyn Bradley
An appeals court ruled in November that payments made to faculty as part of early retirement deals are taxable even if the deals include relinquishment of tenure rights. The case, University of Pittsburgh v. United States of America, involved payments made to administrators and faculty members in the 1980s and 1990s. The university had paid Social Security taxes on the payments, but in 2001 requested a refund of $2.2 million paid for tenured faculty members. When the Internal Revenue Service declined, the university sued. In 2005, a judge ordered the IRS to issue the refund. But the IRS appealed to the Third Circuit, resulting in the present ruling.
The three-judge Third Circuit appeals panel was divided on the issue, as have been courts which previously ruled on it. In 2001, the U.S. Court of Appeals for the Eighth Circuit ruled that payments made to tenured professors by North Dakota State University as part of an early retirement program were in exchange for the relinquishment of a property interest rather than compensation and thus could not be considered “wages” under the Federal Insurance Contributions Act, although similar payments to administrators were deemed wages. But in 2006, the U.S. Court of Appeals for the Sixth Circuit ruled that payments made to tenured Michigan high school teachers as part of an early retirement program should be taxed. Some observers believe the issue is destined for the Supreme Court.
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