The IRS filed a petition for certiorari on May 31 asking the Supreme Court to review the Sixth Circuit's ruling in United States v. Quality Stores (No. 10-1563), which held that certain severance payments were not subject to payroll taxes under the Federal Insurance Contributions Act (FICA).
The Sixth Circuit 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 decision split the Sixth Circuit from the U.S. Court of Appeals for the Federal Circuit, which ruled in CSX Corp. v. United States (518 F.3d 1328) that severance payments were subject to FICA taxes.
It appears reasonably likely that the Supreme Court will consider the case given the split in appeals courts and the more than $1 billion in taxes that the IRS has said is at stake. Employers with potential FICA refund claims on severance payments should file protective claims for all open years to ensure they preserve their ability to obtain a potential refund if the Supreme Court rules favorably. However, taxpayers can also consider delaying their claims until absolutely necessary to preserve the statute of limitations, because the issue may still be a long way from resolution.
The Supreme Court is not even expected to announce if it will hear the case until September at the earliest, and actually hearing the case and reaching a decision would come much later. The Supreme Court could also decline to hear it. The IRS has generally been denying protective claims outside of the Sixth Circuit based on CSX. 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.
If the Supreme Court declines to hear Quality Stores, 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 severance payments similar to those in Quality Stores. The outlook for taxpayers in other circuits would be less clear. The IRS would likely continue to challenge refund claims outside of the Sixth Circuit, with cases developing slowly. The IRS could also consider additional guidance or settlement offers.
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.
