On May 31, the final day of its extension period, the government filed a petition for certiorari with the US Supreme Court in United States v. Quality Stores, Inc. If granted, the Supreme Court will decide whether severance payments made to employees as a result of an involuntary reduction in force are ‘wages’ for FICA tax purposes. The Sixth Circuit held that supplemental unemployment compensation benefits (SUB pay) made to former employees were not wages subject to FICA taxes. However, the Sixth Circuit’s ruling is in direct conflict with the Federal Circuit Court of Appeals’ opinion in CSX Corp. v. United States, where the court held that similar payments were subject to FICA taxes.
In its petition, the IRS estimates that the total dollar amount at stake as a result of the Quality Stores decision is over $1 billion. Given the circuit split, the amount at issue and the desirability of a uniform rule, many commentators believe the case is a good candidate for Supreme Court review. As a result, it is imperative that employers take the necessary steps to preserve their rights to FICA tax refunds for severance payments made during 2010 and subsequent years.