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Supreme Court to Weigh Taxability of Severance Pay

Tuesday, 01 Oct 2013 03:10 PM

The U.S. Supreme Court agreed to consider whether severance pay to workers laid off involuntarily is subject to federal payroll tax in a case the Obama administration has warned could affect $1 billion in tax refund claims.

Pitting defunct rural retailer Quality Stores Inc. against the U.S. Internal Revenue Service, the dispute centers on the Federal Insurance Contributions Act tax, or FICA, which helps finance two major social programs: Social Security retirement pensions, and Medicare health insurance for the aged.

FICA taxes are paid in part by the employer and in part by the employee, whose share is normally withheld from paychecks.

Midwest-based Quality Stores served mainly farmers and rural people. It went bankrupt in 2001 and closed all 300 of its stores. Thousands of workers were laid off, with severance pay, on which the company paid and withheld FICA taxes.

The company in 2002 claimed an IRS refund for just over $1 million in FICA taxes, roughly half paid by the company and half withheld from former employees' severance pay.

The retailer argued that severance pay should not be subject to FICA taxes. The IRS replied otherwise, saying severance pay, like any other wage, is taxable for FICA purposes.

"The severance payments at issue here are clearly 'wages' for FICA purposes," the government said in an August filing.

The IRS could not be reached for comment on Tuesday.

A lawyer in Michigan representing Quality Stores was not immediately available to offer a comment.

RECESSION ECHOES

The severance FICA issue has been disputed for years, but "rose from the ashes like the phoenix because of the recession," said Marianna Dyson, a lawyer with Miller & Chevalier.

The case has implications for many companies that paid taxes on severance to workers laid off in the 2007-2009 recession. Many corporations have claimed refunds that could be paid if Quality Stores prevails, tax lawyers said on Tuesday.

The 6th U.S. Circuit Court of Appeals ruled in September 2012 that both Quality Stores Inc. and its former employees could claim a refund from the IRS. The federal government appealed that decision to the Supreme Court.

But in an earlier, divergent opinion in 2008, a federal appeals court ruled against railroad group CSX Corp., saying it was liable for FICA tax on severance.

The Obama administration said in court papers there are more than 2,400 refund claims pending on the same issue.

The court's order on Tuesday said Justice Elena Kagan is taking no part in the case. As is customary court practice, she did not give a reason. Kagan has been sitting out administration disputes from when she served as U.S. solicitor general, before her August 2010 Supreme Court appointment.

Oral arguments and a decision are due in the court's coming term, which starts on Oct. 7 and ends in June.

© 2017 Thomson/Reuters. All rights reserved.

 
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The U.S. Supreme Court agreed to consider whether severance pay to workers laid off involuntarily is subject to federal payroll tax in a case the Obama administration has warned could affect $1 billion in tax refund claims.
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2013-10-01
Tuesday, 01 Oct 2013 03:10 PM
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