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2000 Term, Number 3 / October 16, 2000

Today the Supreme Court granted certiorari in two cases, one of which is of potential interest to the business community. Amicus briefs in support of the petitioner are due on Thursday, November 30, 2000, and amicus briefs in support of the respondent are due on Tuesday, January 2, 2001. The Court also invited the Solicitor General to express the views of the United States in one case of interest to the business community. Any questions about these cases should be directed to Donald Falk (202-263-3245) or Miriam Nemetz (202-263-3253) in our Washington office.

Taxation — Interpretation of FICA and FUTA —Tax Treatment of Award of Back Wages. The Supreme Court granted certiorari in United States v. Cleveland Indians Baseball Co., L.P., No. 00-203, to decide whether, for purposes of taxation under the Federal Insurance Contribution Act (FICA), 26 U.S.C. §§ 3101-3128, and the Federal Unemployment Tax Act (FUTA), 26 U.S.C. §§ 3301-3311, an award of back wages should be attributed (a) to the year in which the award was made or (b) to the year in which services were rendered. 

In 1994, the Major League Baseball clubs and the Major League Baseball Players Association settled a dispute over the clubs' alleged violation of the free agency rights of baseball players during the 1986-1988 seasons. As a result of the settlement, the Cleveland Indians paid approximately $2 million in back wages for the 1986 and 1987 seasons to several former players, none of whom was still with the team. When it made the settlement payments in 1994, the team withheld and remitted to the federal government the players' share of FICA taxes, and paid its own share of FICA and FUTA taxes, as if the payments to the players were wages attributable to 1994.

The Indians then filed an action in federal district court seeking a refund of the FICA and FUTA taxes paid. Among other things, the Indians contended that the FICA and FUTA payments should be attributed to 1986 and 1987, when the underlying services were rendered. Accordingly, the team sought a full refund because it had already paid the maximum FICA and FUTA taxes due for each player in 1986 and 1987. The district court granted summary judgment to the Indians and ordered the United States to refund the taxes. 1999 WL 72866 (N.D. Ohio).

The Sixth Circuit affirmed in an unpublished per curiam decision. 2000 WL 659028. Relying on Bowman v. United States, 824 F.2d 528, 530 (6th Cir. 1987), the court of appeals stated that its precedent "clearly indicates that the statutory provision in question requires settlements for back wages to be allocated to the period in which they were earned or should have been paid, and not to the period in which the back wages were actually disbursed." 2000 WL 659028, at *2.

The Sixth Circuit's holding accords with the Fifth Circuit's decision in Johnston v. Harris County Flood Control Dist., 869 F.2d 1565, 1580 (5th Cir. 1989), cert. denied, 493 U.S. 1019 (1990). It conflicts with rulings of the Fourth and Tenth Circuits. See Hemelt v. United States, 122 F.3d 204, 210 (4th Cir. 1997); Walker v. United States, 202 F.3d 1290, 1293 (10th Cir. 2000). The Internal Revenue Service has announced that it will not follow the rule adopted by the Sixth Circuit. See AOD 1988-006, 1988 WL 570743 (IRS) (May 6, 1988); Rev. Rul. 89-35, 1989-1 C.B. 280.

Because employment claims in diverse settings can yield back pay awards subject to taxation under FICA and FUTA, the resolution of the question presented in this case is significant to all businesses.

* * * * *

The Supreme Court invited the Solicitor General to express the views of the United States in Atlantic Richfield Co. v. Union Oil Co., No. 00-249. The questions presented in this case concerning a controversial gasoline patent are (1) whether a patent should be invalidated for abuse of the regulatory and patent processes if the patentee filed a broad application in anticipation of forthcoming regulatory requirements and then amended the application to resemble those requirements; and (2) whether a court may construe patent claims to be limited to a particular intended use not stated in the patent, where the added limitation of intended use is designed to avoid invalidation of the patent as anticipated by prior art.

This Mayer, Brown, Rowe & Maw Supreme Court Docket Report provides information and comments on legal issues and developments of interest to our clients and friends. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

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