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A few weeks ago, the 6th Circuit ordered the IRS to refund over
$1 million of Social Security (FICA) taxes on severance benefits
that Quality Stores paid in connection with involuntary
terminations of employment.1 If your company has paid
FICA taxes under similar circumstances, please consider seeking a
refund. The following Q&As demonstrate that seeking one is
easy.
Q-1: What are the key facts that could open the door
for a FICA refund?
The 6th Circuit's decision rests on a conclusion that the
severance pay satisfied this five-part statutory test:
1. the employer made payments to employees,
2. the payments were pursuant to a company-sponsored plan,
3. the payments were made because of the employees'
permanent separation from employment,
4. that separation resulted directly from a reduction in force
or plant or operations shutdown, and
5. the payments were included in the gross income of the
employees.
Q-2: What was the 6th Circuit's
rationale?
The court explained that satisfaction of the five requirements
listed above qualifies the severance as "supplemental
unemployment benefit" (SUB) payments within the meaning of
Internal Revenue Code (the "Code") section 3401(o). This,
as the 6th Circuit reasoned, exempts the severance from FICA
because the premise for Code section 3401(o) is that SUB payments
are not "wages" for tax withholding (or FICA) purposes,
and only become subject to tax withholding due to section
3401(o)'s "extension of withholding to certain payments
other than wages" (quoted from its title in the tax code).
Q-3: Will the 6th Circuit's decision come to apply
nationwide?
That is an open question, and there is contrary authority. The
Federal Circuit reached a different decision in 2008, in CSX
Corp. v. United States, 518 F.3d 1328. The 6th Circuit
squarely rejected that decision as resting on an argument that
"misses the target" and creates inconsistency within the
Federal Circuit's own law. Further, IRS revenue rulings reject
the 6th Circuit view. The 6th Circuit focused at length on this,
and concluded as follows: "we resolve the tension between the
statutory enactments and the IRS revenue rulings in favor of the
expressed will of the legislature."
Overall, the 6th Circuit's decision provides a clear basis
for seeking FICA refunds in other jurisdictions. Those who pursue
relief should have a reasonable prospect for success. Nevertheless,
because the Internal Revenue Service has not acquiesced in the
Quality Stores decision, employers who do not have
significant operations within the 6th Circuit (Kentucky, Ohio,
Michigan, and Tennessee) should be prepared to litigate the
matter.
Q-4: What are the steps to pursue a FICA
refund?
First, the employer files a protective claim for refund with the
Internal Revenue Service, seeking a refund of the employer's
and employees' share of FICA taxes. The deadline for seeking a
refund of FICA taxes for a given year is three years from the
following April 15. Thus, a refund claim for FICA taxes for the
four quarters of 2009 must be filed by April 15, 2013.
Second, after the earlier of (1) the IRS' denial of the
refund claim or (2) the lapse of six months, the employer could
either file suit in federal district court to obtain the refund or
await the resolution of the conflict in the circuits between the
decisions in Quality Stores and CSX Corp.
If the IRS denies the refund claim, the employer will have two
years to bring suit to federal district court. Although the
employer could also bring suit in the Court of Federal Claims, it
would not be advisable as those courts will be governed by the
CSX Corp. decision.
Q-5: Where can I find the 6th Circuit's
decision?
Just go to U.S. v Quality Stores
(http://www.ca6.uscourts.gov/opinions.pdf/12a0313p-06.pdf). A copy
of the decision is attached for ease of reference.
Footnote
1 United States v. Quality Stores, Inc., No.
10-1563 (6th Cir. Sept. 7, 2012).
The content of this article does not constitute legal advice
and should not be relied on in that way. Specific advice should be
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