U.S. Supreme Court Agrees To Hear Government’s Appeal Of Sixth Circuit’s Ruling In U.S. v. Quality Stores That SUB Payments Are Not ‘Wages’ Subject To FICA Taxation

On October 1, 2013, the U.S. Supreme Court agreed to hear the federal government’s appeal of the Sixth Circuit’s decision in United States v. Quality Stores, Inc. (In re Quality Stores, Inc.), 693 F.3d 605 (6th Cir. 2012), rehearing denied, rehearing, en banc., denied, 2013 U.S. App. LEXIS 882 (6th Cir. 2013), cert. granted, Oct. 1, 2013 (No. 12-1408). Justice Elena Kagan did not participate in the decision to hear the case.

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,” the U.S. Court of Appeals for the Sixth Circuit in Quality Stores held that supplemental unemployment compensation benefit (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 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 more than $4 billion.

After the government’s petition for rehearing en banc was denied by the Sixth Circuit on January 4, 2013, the government filed a petition for certiorari with the Supreme Court. Given the circuit split created by the Sixth Circuit’s decision in Quality Stores, the fact that the United States was the petitioner, the large dollar amount of pending refund claims, and various other factors, the Supreme Court’s decision to review the case was not unexpected. Briefing and oral argument in the case are expected to occur within the next few months and the Supreme Court is expected to issue its decision in the case during its current term.

Appellees Quality Stores, Inc., et al. are represented by Robert S. Hertzberg, co-chairman of the Corporate Restructuring and Bankruptcy Practice Group of Pepper Hamilton LLP and Michael H. Reed, a senior partner in the group. In the matter, Hertzberg and Reed also have consulted with Lisa B. Petkun, a partner in Pepper’s Tax Practice Group. Hertzberg will argue the case and will be joined by Reed on the brief.


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