The IRS filed a petition on October 18, 2012 for en banc review by the US Court of Appeals for the Sixth Circuit of a key decision in favor of the taxpayer on the tax treatment of supplemental unemployment compensation benefits (SUB pay). The Sixth Circuit recently held on September 7, 2012 in United States v. Quality Stores, Inc. that the SUB payments made to former employees were not wages subject to social security and Medicare (FICA) tax. As a result, Quality Stores and its former employees were entitled to a refund of all FICA taxes—over $1 million—paid on the SUB payments.
While the decision was favorable for Quality Stores and its employees, it is unclear whether and when other employers that also made SUB payments might realize any benefit from the decision. What is clear, though, is that the IRS will continue to challenge the Quality Stores decision, and employers must take steps to protect their right to recover FICA taxes in the event there is a final determination that SUB payments are not wages for purposes of FICA taxes.