Severance Pay not subject to Employment Tax Says 6th CA

The U.S. Court of Appeals for the Sixth Circuit today affirmed a federal district court decision that severance payments are not wages for purposes of the Federal Insurance Contributions Act (FICA) tax. In re Quality Stores, Inc., No. 10-1563 (6th Cir. September 7, 2012)

This tax decision could have wide business implications since the U.S. appeals court ruled that employment taxes should not have been imposed on severance pay in an involuntary layoff.

The 6th Circuit Court of Appeals said Quality Stores Inc, a retailer, and employees who participated in the suit, could claim a refund for employment tax imposed on the severance pay.

The taxes at issue were Federal Insurance Contributions Act, or FICA, taxes that help pay for the U.S. Social Security retirement pension program and the Medicare health program. FICA taxes are paid by a company and its employees.

This decision could trigger a flood of claims for severance-pay employment-tax refunds by companies that had involuntary layoffs.

This issue is one that has been is dispute for years and could end up before the Supreme Court because there is a split between appeals courts over it.  In 2008, a separate court ruled against railroad company CSX Corp, saying it was liable for FICA taxes on severance packages.

In CSX Corp., 518 F.3d at 1346, the Federal Circuit adopted the IRS’s eight-part administrative definition of SUB pay set out in Rev. Rul. No. 56-249 and Rev. Rul. 90- 72 rather than the express statutory definition provided by Congress in §3402(o). That court characterized the payments before it as “dismissal pay” subject to FICA tax.  

By contrast, we resolve the tension between the statutory enactments and the IRS revenue rulings in favor of the expressed will of the legislature.

In doing so, the 6^th Circuit admitted their ruling created a conflict. "We acknowledge that this issue of statutory construction is complex and that the correct resolution is far from obvious".  "While the Supreme Court may ultimately provide us with the correct resolution ... only Congress can clarify the statutes concerning the imposition of FICA tax."

 

If you have Payroll Tax Problems, contact the Tax Lawyers at Marini & Associates, P.A. for a FREE Tax Consultation at www.TaxAid.us or www.TaxLaw.ms or Toll Free at 888-8TaxAid (888 882-9243).

 

UnitedStates v. Quality Stores Inc, No. 10-1563.