Supreme Court Decides Severance Not Exempt From FICA

by FordHarrison
Contact

Executive Summary:  On March 25, 2014, the United States Supreme Court unanimously held that certain severance payments (described as "supplemental unemployment compensation benefits" or "SUBs") constituted taxable wages for purposes of FICA.  See United States v. Quality Stores, Inc.  No. 12-1408 (2014).  The Sixth Circuit had held that the payments were not wages subject to FICA, in a decision from which the IRS appealed.  See In re Quality Stores, Inc., 693 F. 3d 605 (6th Cir. 2012).

The Federal Circuit had previously held that similar payments were wages for purposes of FICA, in CSX Corp. v. United States, 518 F. 3d 1328 (Fed.Cir., 2008). The Sixth Circuit decision created a conflict that needed to be resolved by the Court.

The Supreme Court's decision was primarily based upon the actual definitions contained in the Internal Revenue Code, specifically sections 3121(a) and (b), which define the terms "wages" and "employment," respectively, for FICA purposes, as well as prior Court decisions such as Social Security Board v. Nierotko, 327 US 358 (1946) (holding that "service" includes not only work actually done but the entire employer-employee relationship for which compensation is paid to the employee by the employer) and Rowan Cos. v. United States, 452 US 247 (1981) (holding that "wages" should generally be defined the same way for income tax withholding and for FICA purposes). The Court also rejected the taxpayer's argument that section 3402(o) of the Code, which provides that "supplemental unemployment compensation benefits" are treated for income tax withholding purposes "as if they were wages," means that they are not wages; rather, the Court found that section 3402(o) was enacted in order to deal with a specific income tax issue, and did not affect the payments' characterization for purposes of FICA.

The Court's decision, written by Justice Kennedy, holds that the severance payments in question, which were (i) made to employees who were involuntarily terminated, (ii) subject to variation based on seniority, and (iii) not conditioned on or linked to the employees' receipt of state unemployment benefits, and which the parties had stipulated qualified as SUBs, constituted taxable wages according to the broad definition used for purposes of FICA. The decision also states that it does not address whether Rev. Rul. 90-72, which deals with payments that are tied to state unemployment benefits, is consistent with the broad definition of wages under FICA.

This was a big-dollar (although generally anticipated) win for the IRS, as over $1 billion of potential FICA refunds – for both employers and employees – was on the line. In addition, it would have changed the future taxation of severance pay, perhaps substantially, at least until a legislative "fix" could be accomplished (if at all).  This should be the final answer as far as severance payments that fall outside the limited exception of Rev. Rul. 90-72 are concerned – they are subject to FICA (and FUTA) taxes, as well as income tax withholding.  Accordingly, any prospective claims or other pending refund claims will be denied.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© FordHarrison | Attorney Advertising

Written by:

FordHarrison
Contact
more
less

FordHarrison on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.