The Supreme Court on Jan. 14 heard oral arguments in United States v. Quality Stores (Ct. Dkt. No. 12-1408), which should settle whether supplemental unemployment benefits (SUB) made for involuntary termination are subject to Federal Insurance Contributions Act (FICA) tax. A favorable decision could open a substantial refund opportunity for any employer who made certain kinds of severance payments in any year still open under the statute of limitations.
The IRS is arguing that severance payments, including SUB payments, are included under the FICA definition of wages under Section 3121(a), which defines wages as "all remuneration for employment." Quality Stores is arguing that SUB payments are not wages, because Section 3402(o)(2), which governs federal income tax withholding, says SUB payments should be treated "as if they were wages."
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 district court ruled that the payments made by Quality Stores were SUB payments that were not subject to FICA tax. On appeal, the Sixth Circuit Court of Appeals affirmed the district court, relying on Rowan Cos. v. United States, 452 U.S. 247 (1981), where the Supreme Court ruled that Congress had intended "wages" to carry the same meaning for purposes of both federal income tax and FICA withholding. However, the decision by the Sixth Circuit deviated from the Federal Circuit's decision in CSX Corp. v. United States, 518 F.3d 1328 (Fed. Cir. 2008), which held that SUB payments were subject to FICA tax.
Taxpayers who have not yet filed protective claims for FICA taxes on SUB payments in open years should do so, and taxpayers whose protective claims have been denied should preserve their ability to file suit. The court is expected to issue a decision by July.
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