On March 25, 2014, the U.S. Supreme Court held, in an 8-0 opinion, that severance pay that is not tied to the receipt of state unemployment benefits is subject to FICA tax. The Court relied upon the broad definition of "wages" found in I.R.C. § 3121(a). The Court reversed the U.S. Court of Appeals for the Sixth Circuit's holding, which viewed an inclusionary income-tax withholding provision, I.R.C. § 3402(o), as implying that severance pay described in that provision is not "wages" for FICA purposes.
The government's certiorari petition relied upon a series of IRS revenue rulings that it described as reflecting the IRS's "administrative practice." These rulings, reflecting reversals of position along the way, culminated in a 1990 ruling holding that supplemental unemployment benefits that are tied to the receipt of state unemployment benefits are exempt from income-tax withholding and from FICA tax. Amicus briefs filed by a prominent professor and others invited the Court to use Quality Stores to address disarray in the lower federal courts over the degree of deference due to IRS revenue rulings, noting that the deference issue had played a role in the arguments below.
The Court's opinion, however, does not rely at all on the revenue rulings; instead, the Court relies upon the breadth of the basic definitional statute, § 3121(a), and upon the legislative purpose behind § 3402(o). The Court wraps up its analysis by noting that it does not reach "the question whether the IRS's current exemption [found in the 1990 revenue ruling] is consistent with the broad definition of wages under FICA." Slip op. 14.
Thus, the Court declines to give any weight to the IRS's "administrative practice" set out in the 1990 ruling, and avoids addressing the disarray in the lower courts. Meanwhile, the Court wonders aloud whether the administrative exception found in the 1990 revenue ruling goes beyond what the basic definitional statute will bear – and the court does so in a case in which the relevant statutory provisions are certainly ambiguous. It is not obvious how to square this last feature of the opinion with any notion that sub-regulatory guidance displaying developmental reversals and inconsistencies is nonetheless entitled to Skidmore deference. It is even more difficult to square this feature of the opinion with any notion that revenue rulings are entitled to Chevron deference. Practitioners might do well to ponder these somewhat muted administrative-law features of the opinion, in addition to taking note of the rather more obvious employee-benefits and tax features of the opinion. It seems quite possible that this 8-0 opinion foreshadows how the Court will rule on some of the deference-related issues that have bedeviled the lower federal courts.
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