The US Supreme Court [official website] ruled [opinion, PDF] unanimously on Tuesday in US v. Quality Stores, Inc. [SCOTUSblog backgrounder] that involuntarily terminated severance packages given to employees are subject to wage taxation under the Federal Insurance Contributions Act (FICA) [text, PDF]. The case stems from the bankruptcy of Quality Stores, a former agricultural speciality retailer based in Michigan. Quality Stores closed more than 300 locations in 2001 and 2002 and terminated its remaining employees as part of a Chapter 11 bankruptcy filing initiated in 2001. Quality stores paid and withheld taxes required under FICA and subsequently filed for a refund with the Internal Revenue Service (IRS) [official website] on behalf of itself and approximately 1,850 former employees. When the IRS did not allow or deny the refund, Quality Stores initiated proceedings in bankruptcy court, which granted summary judgment in its favor. Tuesday's opinion reversed a US Court of Appeals for the Sixth Circuit [official website] ruling in favor of the government.
The court held that severance payments squarely fall within the definition of wages for purposes of income-tax withholding under FICA and that these payments qualify under the broad definition of wages as "all remuneration for employment" as defined by FICA. The court reasoned that severance packages are similar to many other benefits employers offer to employees above and beyond salary payments, and the court rejected Quality Store's argument that the payments represented supplemental unemployment compensation, not wages. With approximately 2,000 FICA tax refunds and a (USD) $1 million refund bid from Quality Stores at stake, this case has drawn the attention of tax professionals around the US. In 2013, the IRS suspended all refund claims for FICA taxes in the Sixth Circuit pending the resolution of this issue. JURIST Guest Columnists Catherine E. Livingston and Lori Hellkamp of Jones Day discussed [JURIST op-ed] the potential consequences of US v. Quality Stores, Inc. on severance pay under FICA in January.