United States: Sixth Circuit Denies Rehearing Of "Quality Stores" Decision On Severance Pay FICA Taxes

The Sixth Circuit Court of Appeals has denied an IRS request for a rehearing of the United States v. Quality Stores, Inc. decision (No. 10-1563) that held that certain severance payments were not subject to payroll taxes under the Federal Insurance Contributions Act (FICA).

The court ruled in Quality Stores that supplemental unemployment benefits (SUB) payments as defined under Section 3402(o) are not subject to FICA tax. SUB payments are generally defined as amounts paid to an employee because of an involuntary separation of employment due to a reduction in work force, the discontinuation of a plant or operation, or other similar conditions.

The IRS now has 90 days from Jan. 4, 2013, to appeal the decision to the Supreme Court. If the case is not appealed to the Supreme Court or the Supreme Court declines to hear it, employers located in Kentucky, Michigan, Ohio and Tennessee (states in the Sixth Circuit) should at that time be able to successfully execute refund claims for FICA taxes on similar severance payments. If the case is appealed and accepted by the Supreme Court, taxpayers will need to wait for a decision – which would also apply to taxpayers in other circuits.

Because of the prospects for a favorable result, taxpayers with similar severance payments can consider filing a protective refund claim while courts consider the issue. The IRS has generally been denying protective claims outside of the Sixth Circuit based on the 2008 ruling from the U.S. Court of Appeals for the Federal Circuit in CSX Corp. v. United States (518 F.3d 1328). The Supreme Court may look to Quality Stores to resolve the issue, but if not, taxpayers are still likely to challenge CSX in other jurisdictions. Taxpayers who have had their protective claims denied outright by the IRS should monitor their two-year window for filing suit and file a Form 907 to extend their deadline when necessary.

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