United States v. Quality Stores

PETITIONER:United States
RESPONDENT:Quality Stores Inc. et al.
LOCATION: Quality Stores Inc.

DOCKET NO.: 12-1408
DECIDED BY: Roberts Court (2010-2016)

CITATION: 572 US (2014)
GRANTED: Oct 01, 2013
ARGUED: Jan 14, 2014
DECIDED: Mar 25, 2014

Eric J. Feigin – on behalf of the petitioner
Robert S Hertzberg – on behalf of the respondents

Facts of the case

In October 2001, Quality Stores — a national company — and its affiliates commenced bankruptcy proceedings. When laying off employees, Quality Stores issued severance pay as part of its employees’ gross income and reported the payments for federal income tax purposes as “wages” on W-2 forms. As required for “wages”, the Federal Insurance Contributions Act (FICA) tax was paid on severance payments. FICA is a tax imposed on wages earned to fund Social Security and Medicare; both employer and employee pay part of the tax. The employee’s part is withheld from his paycheck. Quality Stores contends that severance pay does not qualify as “wages”, but rather payments under a Supplemental Unemployment Benefit (SUB) plan that are not taxable under FICA. SUB is a corporate program that creates severance payments in the event of involuntary termination; SUB payments do not qualify as “wages” under FICA because they are given after termination of a job rather than for work completed.

Based on this line of reasoning, Quality Stores filed for a refund from the Internal Revenue Service (IRS). The IRS did not respond to Quality Stores’ request for a refund, neither by allowing the claim nor denying it, and Quality Stores sued the IRS. The federal district court agreed with Quality Stores’ view on severance payments. The U.S. Court of Appeals for the Sixth Circuit affirmed the district court and held that severance pay satisfies the elements Congress set out to determine SUB payments, which therefore makes such payments exempt from FICA taxes.


Are severance payments for employees who were involuntarily terminated taxable under the Federal Insurance Contributions Act?

Media for United States v. Quality Stores

Audio Transcription for Oral Argument – January 14, 2014 in United States v. Quality Stores

Audio Transcription for Opinion Announcement – March 25, 2014 in United States v. Quality Stores

Justice Kennedy has the opinion of the Court today in case 12-1408 United States versus Quality Stores.

One of the most important mechanisms in the federal taxes in this the withholding of tax from salaries and wages.

And the most substantial and evident withholding is for federal income tax.

Another tax on wages is levied by the Federal Insurance Contribution Act or FICA in the FICA tax funds Social Security benefits.

The question in this case is whether severance payments to terminated employees are subject to the FICA tax.

The withholding provision for the income tax states that in the case of severance payments, which what’s involved here, the payment shall be treated as if they are wages.

And the question here is what bearing if any that section has on whether severance payments are subject to FICA taxes.

And in this case, Quality Stores and their bankruptcy proceedings, in order to keep the goodwill of employees were terminated and also they keep some employees working for a time even though they were slated for termination.

The company paid them severance payments.

Quality Stores reported the severance payments as wages on W-2 tax forms and paid the employers required share of the FICA taxes and withheld the employee share the FICA taxes.

Then, Quality Stores on its own behalf and on behalf of about 1,850 employees filed for a refund and the refund was — the FICA taxes were just over a million dollars.

The Court of Appeals for the Sixth Circuit held that the severance payments are not subject to the FICA tax.

Other Courts of Appeals have reached the opposite in conclusion.

This Court granted certiorari.

Today’s decision holds that in this case, the Court of Appeals for the Sixth Circuit was in error.

The code section that it relied upon does not control.

The severance payments are subject to the FICA tax.

The judgment of the Court of Appeals for the Sixth Circuit is reversed and the case is remanded for further proceedings.

The opinion of the Court is unanimous.Justice Kagan took no part in the consideration or decision of the case.