United States: Pepper Victory Reaffirmed: Sixth Circuit Denies Petition For Rehearing U.S. v. Quality Stores Ruling That SUB Payments Are Not ‘Wages’ Subject To FICA Taxation

As previously reported in our September 10, 2012 Client Alert, " Pepper Victory: Sixth Circuit Holds that Supplemental Unemployment Compensation Benefits Are Not 'Wages' Subject to FICA Taxation," in an important recent decision, United States v. Quality Stores, Inc., et al., Case No. 01-1563, 2012 U.S. App. LEXIS 18820 (6^th Cir. Sept. 7, 2012), the U.S. Court of Appeals for the Sixth Circuit held that supplemental unemployment compensation benefits (SUB payments) paid by a bankrupt company to its former employees were not wages subject to taxation under the Federal Insurance Contributions Act (FICA). Accordingly, the employer and its former employees were entitled to refunds of amounts paid to the Internal Revenue Service (IRS) on account of FICA taxes from severance payments that had been made after the employer filed for bankruptcy. The Sixth Circuit declined to follow a contrary 2008 decision on the issue of the Federal Circuit, CSX Corp. v. United States, 518 F.3d 1328 (Fed. Cir. 2008), the only other court of appeals decision to address the issue. The refund claim at issue in Quality Stores totals approximately $1 million (plus interest) and it is estimated that there are similar pending refund claims totaling over $4 billion.

On October 18, 2012 the government filed a petition for rehearing en banc,which was denied on January 4, 2013. Many observers expect the government to ask the U.S. Supreme Court to review the decision and believe there is a good chance that the Court would accept the case for review. However, it is also possible that the government will not seek to have the Supreme Court review the case but rather will continue to litigate the issues in other circuits. In the meantime, Quality Stores will provide strong support to taxpayers seeking refunds of FICA taxes paid in connection with the many workforce reductions that occurred during the Great Recession.

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