No Refunds Allowed for FICA Taxes Paid on Retirement Benefits Never Received

(Parker Tax Publishing November 2025)

The Federal Circuit affirmed the Claims Court and held that United Airlines pilots were not entitled to a refund of the lump sum of FICA taxes paid, pursuant to Code Sec. 3121(v)(2), on the value of their full retirement benefits under a nonqualified deferred compensation plan, some of which were not distributed due to United Airlines filing for bankruptcy. The court concluded that there was no constitutional or other barrier to the requirement that FICA tax be paid in a single lump sum when the beneficiaries of the plan first begin receiving their benefits. Biestek v. U.S., 2025 PTC 351 (Fed. Cir. 2025); Beavis, et al. v. U.S., 2025 PTC 352 (Fed. Cir. 2025).

Background

In 2009, a group of retired United Airlines pilots filed a lawsuit seeking refunds of FICA taxes paid upon their retirement when they began receiving retirement benefits under United's nonqualified deferred compensation plan. Pursuant to a special timing rule in Code Sec. 3121(v)(2), the FICA tax for each pilot was paid in a lump sum when each pilot began receiving benefits under the plan. Specifically, Code Sec. 3121(v)(2) provides that to the extent an amount deferred under a nonqualified deferred compensation plan constitutes wages for FICA purposes, that amount must be taken into account as wages for FICA tax purposes as of the later of: (1) the date on which the services creating the right to that amount are performed; or (2) the date on which the right to that amount is no longer subject to a substantial risk of forfeiture.

After the pilots retired, United entered bankruptcy and the pilots' deferred compensation plan was terminated. Because the plan was terminated, the total amount that each pilot actually received in benefits was less than the value of the expected benefits at the time each pilot retired and the amount each pilot paid in FICA taxes was greater than each would have paid if the FICA tax had been paid only on benefits actually received.

The pilots sought refunds of what they characterized as overpayments of their FICA taxes. When the IRS denied those claims, they appealed to the Claims Court. The Claims Court sided with the IRS and rejected the group's argument that Code Sec. 3121(v)(2) is unconstitutional because it authorizes the government to collect taxes on income before that income is realized. The court ruled that the FICA tax is not an income tax, but an excise tax, and there is no constitutional or other barrier to Congress's decision, in the circumstances covered by Code Sec. 3121(v)(2), to require that the FICA tax be paid in a single lump sum when the beneficiaries of the plan first begin receiving their benefits.

The Claims Court also rejected the pilots' assertion that the government's failure to return the taxes paid on income that the pilots never received constituted unjust enrichment. According to the court, the theory of unjust enrichment is an equitable implied-in-law contract claim that is not within the waiver of sovereign immunity effected by the Tucker Act. Finally, the Claims Court rejected the pilots' argument that because the IRS Chief Counsel published advice on the legal issues surrounding the pilots' claims while those claims were pending, their claims were not independently reviewed by IRS appeals officers. The court explained that because it reviews tax refund claims de novo, any effect of the IRS Chief Counsel's advice on the decisions by the IRS appeals officers would be irrelevant.

The pilots appealed to the Federal Circuit and their case was combined with another case that raised similar issues, Beavis v. Comm'r. The pilots' principal argument was that Code Sec. 3121(v)(2) is unconstitutional because it imposes a tax on a right to income to be received in the future, rather than income actually received. Their argument rested on two propositions: (1) that the FICA tax is an income tax and the Sixteenth Amendment to the Constitution prohibits imposing taxes on income that has not been realized, and (2) the Supreme Court's decision in Comm'r v. Glenshaw Glass Co., 348 U.S. 426 (1955), defines "income" for all tax purposes to mean "instances of undeniable accessions to wealth, clearly realized, and over which the taxpayers have complete dominion." The pilots also argued that the statute establishing the FICA tax designates it as being "collected by the employer of the taxpayer, by deducting the amount of the tax from the wages as and when paid" which was not done in the pilots' case. Finally, the pilots reasoned that (1) because some of the retired United pilots were granted refunds, they should all be given refunds; and (2) the IRS was required by the Administrative Procedure Act (APA) to exhaust its administrative remedies before suing to recover any other taxes on income.

Analysis

The Federal Circuit affirmed the Claims Court and held that the United Airlines pilots were not entitled to a refund of the lump sum of FICA taxes paid on the value of their full retirement benefits even though they never fully received those benefits. The pilots' primary argument, the court observed, was essentially a challenge to the constitutionality of the special timing rule in Code Sec. 3121(v)(2) based on the principles in Glenshaw Glass Co. However, the court said, that case provided no support for the pilots' argument because it is a case construing the statute that defines "gross income" for income tax purposes and the statutory term at issue in the FICA statute is "wages."

Congress, the Federal Circuit said, is entitled to adopt different ways of defining wages in different circumstances. In the special timing rule of Code Sec. 3121(v)(2), the court noted, Congress has defined "wages," for purposes of nonqualified deferred compensation plans, as including deferred income and has imposed FICA taxes on that deferred income based on the "amount deferred." The definition of the "amount deferred" in Code Sec. 3121(v)(2), the court said, includes the receipt of something of value, even though the value may not be realized at the time of the receipt. Thus, "wages," as defined by Congress for purposes of Code Sec. 3121(v)(2), can be taxed before being received by the employees. The court concluded that there was no constitutional or other barrier to Congress's requirement in Code Sec. 3121(v)(2) that FICA tax be paid in a single lump sum when the beneficiaries of a plan first begin receiving benefits.

With respect to the pilots' second argument, the court noted that the special timing rule of Code Sec. 3121(v)(2) creates a statutory exception to the general rule of Code Sec. 3102. The court observed that Code Sec. 3121(a) defines "wages" 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. Retirement benefits, the court said, undoubtedly qualify under that definition as "wages." The only question, the court said, is whether those benefits can lawfully be defined to include the present value of promised wages to be paid in the future. According to the court, such a promised benefit clearly has present value, and the court discerned no constitutional or other impediment to Congress's decision to tax the value of that benefit before the funds are actually paid.

With respect to the pilots' argument regarding some individuals receiving refunds, the court said that the fact that the government may have granted some refunds does not mean that it forfeited its right to enforce the governing statutes against other claimants.

Finally, the court rejected the pilots' APA argument after noting that any requirement to exhaust administrative remedies applies to parties seeking relief from a government agency, not the other way around.

For a discussion of the special FICA timing rule for nonqualified deferred compensation payments, see Parker Tax ¶213,130.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

Parker Tax Pro Library - An Affordable Professional Tax Research Solution. www.parkertaxpublishing.com

We hope you find our professional tax research articles comprehensive and informative. Parker Tax Pro Library gives you unlimited online access all of our past Biweekly Tax Bulletins, 22 volumes of expert analysis, 250 Client Letters, Bob Jennings Practice Aids, time saving election statements and our comprehensive, fully updated primary source library.

Try Our Easy, Powerful Search Engine

A Professional Tax Research Solution that gives you instant access to 22 volumes of expert analysis and 185,000 authoritative source documents. But having access won’t help if you can’t quickly and easily find the materials that answer your questions. That’s where Parker’s search engine – and it’s uncanny knack for finding the right documents – comes into play

Things that take half a dozen steps in other products take two steps in ours. Search results come up instantly and browsing them is a cinch. So is linking from Parker’s analysis to practice aids and cited primary source documents. Parker’s powerful, user-friendly search engine ensures that you quickly find what you need every time you visit Our Tax Research Library.

Dear Tax Professional,

My name is James Levey, and a few years back I founded a company named Kleinrock Publishing. I started Kleinrock out of frustration with the prohibitively high prices and difficult search engines of BNA, CCH, and RIA tax research products ... kind of reminiscent of the situation practitioners face today.

Now that Kleinrock has disappeared into CCH, prices are soaring again and ease-of-use has fallen by the wayside. The needs of smaller firms and sole practitioners are simply not being met.

To address the problem, I’ve partnered with a group of highly talented tax writers to create Parker Tax Publishing ... a company dedicated to the idea that comprehensive, authoritative tax information service can be both easy-to-use and highly affordable.

Our product, the Parker Tax Pro Library, is breathtaking in its scope. Check out the contents listing to the left to get a sense of all the valuable material you'll have access to when you subscribe.

Or better yet, take a minute to sign yourself up for a free trial, so you can experience first-hand just how easy it is to get results with the Pro Library!

Sincerely,

James Levey

Parker Tax Pro Library - An Affordable Professional Tax Research Solution. www.parkertaxpublishing.com