United States: Sixth Circuit Denies IRS Request To Rehear Decision Upholding Refund For FICA Taxes On Certain Severance Payments

The Sixth Circuit Court of Appeals has denied an IRS request for an en banc rehearing of its decision in United States v. Quality Stores, Inc. (No. 10-1563), which held that certain severance payments were not subject to payroll taxes under the Federal Insurance Contributions Act (FICA). The IRS now has 90 days from Jan. 4 to appeal the decision to the Supreme Court.

Employers with pending protective claims (or other potential refund claims for open years) in the Sixth Circuit still need to wait for the case to be fully resolved before obtaining a refund. Many taxpayers outside the Sixth Circuit have also filed protective claims, but the IRS has largely denied these claims based on the 2008 decision from the U.S. Court of Appeals for the Federal Circuit in CSX Corp. v. United States (518 F.3d 1328). These taxpayers need to monitor their two-year window for filing suit and should file Form 907 to extend their deadlines when necessary.

Taxpayers who have not yet filed protective claims should consider doing so, but those outside the Sixth Circuit should wait as long as possible in order to postpone the start of their window for filing suit after a denied claim.

Background

FICA generally subjects all wages to matching employer and employee contributions for Social Security and Medicare taxes. The IRS has long argued that severance payments made at the separation of service are wages for FICA tax purposes, and the Federal Circuit agreed with the IRS in CSX in 2008. But the Sixth Circuit has now ruled in Quality Stores that supplemental unemployment benefits (SUB) payments as defined under Section 3402(o) are exempt from FICA. 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 an operation, or other similar conditions.

Section 3402(o) provides that SUB payments should be treated "as if they were wages" for income tax withholding purposes. The taxpayer in Quality Stores successfully argued that this rule implies that SUB payments are not actually wages and that there is no corresponding rule to treat them as if they were wages for FICA tax purposes.

Next steps

If the case is not appealed to the Supreme Court (or if the Supreme Court declines to hear it), employers located in Kentucky, Michigan, Ohio and Tennessee (states in the Sixth Circuit) should be able to successfully execute refund claims for FICA taxes on SUB payments. For employers outside these states, it is more complicated. The IRS has been denying protective refund claims outright based on the CSX decision, and the IRS may continue to argue that if the Supreme Court does not take up Quality Stores, CSX remains the controlling decision in all other jurisdictions. Under this scenario, taxpayers would likely begin challenging CSX in other jurisdictions.

A Supreme Court decision should settle the issue completely allowing refunds for taxpayers in all jurisdictions or for no one. But a Supreme Court decision ruling could still be a long time coming, and challenges in other circuits (if the Supreme Court does not hear the case) could take years to resolve. So, taxpayers in all circuits should consider filing protective refund claims. Taxpayers outside of the Sixth Circuit should keep in mind that their claims are likely to be denied and the two-year window to file suit starts as soon as they receive the notice of denial. The statute of limitations to file a protective refund claim for 2009 (all four quarters) does not expire until April 15, 2013, so taxpayers can still wait for several months before filing a protective claim to keep 2009 open.

Responding to a denied claim

A protective claim is contingent on a future event that may not be determinable until after the time period for filing a claim expires. The IRS will generally delay action on a protective claim until the contingency is resolved but has been denying protective claims made outside the Sixth Circuit by arguing that CSX is settled and controlling in all other jurisdictions.

Taxpayers who have received or will receive a notice of disallowance on a protective claim have four options:

1. File an administrative appeal with the IRS within 30 days after the notice is issued.

2. Request the IRS to reconsider the disallowance in light of the Quality Stores ruling.

3. Bring a lawsuit immediately against the IRS.

4. Reserve the right to file suit in federal court (i.e., wait and see).

The first and second options appear unlikely to succeed. Taxpayers with a significant refund at stake who believe they could receive a favorable decision in their district court or their circuit can consider bringing suit themselves. But most taxpayers should wait and preserve their protective claim while the cases develop. Even if the Supreme Court does not take up Quality Stores, the IRS position is likely to be challenged in other circuits. Taxpayers have only two years from the date of receipt of an IRS notice of disallowance to file suit in federal court to seek an order overturning the IRS's decision, but can file Form 907 when this deadline approaches. The IRS must accept and sign Form 907 for the form to be effective and has generally been accepting two-year extensions.

Filing a FICA refund claim

FICA protective refund claims may be filed without notifying the affected employees. To file an actual refund claim (rather than a protective claim) for the employer's share of FICA tax, however, the employer must first make a reasonable attempt to notify the affected employees of the availability of the refund and offer to file a refund claim on behalf of the employees for the employees' share of FICA tax. To file a refund claim on the employee's behalf, the employee must provide the employer with a written statement certifying that the employee will not file a refund claim directly with the IRS and also provide written consent for the employer to file the refund claim on the employee's behalf. If employees cannot be located and/or do not provide their written consent, the employer may file a refund claim for just the employer's share of FICA tax.

To ultimately file an actual refund claim, employee wage information must be preserved. Because it may take several years for the appeals process to conclude, employers should act now to maintain and preserve the wage information necessary to file actual refund claims.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Sheppard Mullin Richter & Hampton
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Sheppard Mullin Richter & Hampton
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions