The Supreme Court Rules that Severance Payments can be Subject to FICA

In an 8-0 decision, the U.S. Supreme Court, on March 25, ruled that retailer, Quality Stores Inc., a large specialty agricultural retailer, was not entitled to a refund of FICA paid on severance payments the company paid to its employees due to layoffs.

Quality Stores, which had over 300 stores, closed all stores and fired all employees in 2001 and 2002. The company paid the disputed taxes and sought a refund claiming that wages should not include severance paid as a result of bankruptcy. Quality Stores contended that the payments represented supplemental unemployment compensation, not wages.

The case was presented in many lower courts that were divided on the issue. The Supreme Court decision reverses rulings by the 6th U.S. Circuit Court of Appeals and a federal district court, which found the payments were not considered taxable wages. The payments were made to 1,850 former employees let go after the company filed for bankruptcy.

The decision is a victory for the present administration and the Justice Department who estimated that the government could face more than $1 billion in tax refund claims from other employers if the decision was upheld. Therefore, all protective claims that were previously filed will be denied and no refunds will be forthcoming to any similarly situated taxpayers.

Text of the opinion is available at http://www.supremecourt.gov/opinions/13pdf/12-1408_6468.pdf.

Should you have any questions related to this Tax Flash, please contact your Marcum Tax Professional.