At issue in United States v. Quality Stores, Inc. was whether severance payments to terminated employees on company cessation were exempt from FICA tax.
The Sixth Circuit addressed this issue and affirmed the federal district court’s holding that the severance payments made by Quality Stores qualified as supplemental unemployment compensation benefits (SUB payments) and, further, did not constitute wages subject to FICA tax (although the payments were taxable income to the employee).
Read the 21-page decision: United States v. Quality Stores, Inc. [PDF 60 KB]
In Quality Stores, the company paid involuntary separation payments as part of a termination of the business. The Sixth Circuit noted that:
…Congress has provided that a SUB payment is: (1) an amount paid to an employee; (2) pursuant to an employer’s plan; (3) because of an employee’s involuntary separation from employment, whether temporary or permanent; (4) resulting directly from a reduction in force, the discontinuance of a plant or operation, or other similar conditions; and (5) included in the employee’s gross income.
Conflict with Federal Circuit
The decision of the Sixth Circuit in Quality Stores conflicts with the Federal Circuit’s decision in CSX Corp. v. United States. Unlike the Sixth Circuit, the Federal Circuit held that involuntary severance payments were “wages” for FICA tax purposes.
With the denial of the government’s request for rehearing before the full Sixth Circuit, the IRS and Department of Justice have until April 4, 2013 (90 days from the denial of the request for rehearing) to file a petition for writ of certiorari for review by the U.S. Supreme Court.
Regardless of whether the government seeks review before the U.S. Supreme Court (or whether the Court decides to hear the case), taxpayers potentially eligible for FICA tax refunds for the 2009 calendar year need to consider filing protective refund claims by April 15, 2013 (note that the statute of limitations period for filing employment tax refund claims for all 2009 quarterly tax periods terminates on April 15, 2013).
Read a September 2012 report [PDF 129 KB] prepared by KPMG LLP: KPMG’s What’s News in Tax: “Quality” Win for Taxpayers Brightens Outlook for FICA Tax Refunds on Severance Pay. This KPMG analysis discusses the Quality Stores case, the circumstances for potential refunds for employers, and some procedural considerations associated with securing a FICA tax refund.