On March 25, 2013, the Supreme Court granted the Solicitor
General’s request for a one-month extension to file a petition for certiorari
in United States v. Quality Stores, Inc.,
693 F.3d 605 (6th Cir. 2012), reh’g en
banc denied 2013 U.S. App. LEXIS 882 (6th Cir. Jan. 4, 2013). In Quality
Stores, the Sixth Circuit, in contrast to the Federal Circuit, held that,
under certain circumstances, severance payments in a reduction-in-force should
be viewed as supplemental unemployment compensation benefits (“SUB”) payments,
rather than “wages” and, thus, not susceptible to FICA withholdings and
payments under I.R.C. § 3402(o). After
the Sixth Circuit denied the government’s petition for rehearing en banc, it was widely anticipated by
the tax bar that the Solicitor General would file a petition for certiorari on
or before the original deadline of April 4.
See, e.g. Stuart J. Bassin, “Sixth
Circuit Denies Government Motion for Rehearing in Quality Stores Employment Tax
Challenge”, Lexology (Feb. 1, 2013); Alan Horowitz, “Rehearing
Denied in Quality Stores”, Tax Appellate Blog (Jan. 7, 2013); Thomas M.
Cryan, Jr., Esq., “Sixth Circuit
Affirms Quality Stores Decision in FICA Taxation of Severance Pay”,
Bloomberg BNA (October 1, 2012);
Instead, the Solicitor, indicating that his office needed further time
to determine whether or not to file, sought a one-month extension until May 3,
which was granted. See United States v. Quality Stores, Inc.,
No. 12-A-921 (March 25, 2013).
The Federal Circuit, in CSX
Corp. v. United States, 518 F.3d 1328 (Fed. Cir. 2008), in contrast to the
Sixth Circuit, rejected the argument, and found RIF severance payments to be
“wages” within the meaning of I.R.C. § 3402.
So, what does all of this mean for employers and employees
when they are negotiating and settling disputes arising out of the RIF of an
employee? The tax bar has been advising
its corporate employer clients to file protective claims for refunds of FICA
payments by filing IRS Form 941-X. See, e.g., Vicki M. Nielsen, “April
Deadlines Relating to FICA Tax Treatment of Severance Pay in Quality Stores are Quickly Approaching”,
Ogletree Deakins (March 13, 2013); Brittany Blackburn Koch, Esq., “Employers’
Deadline to File Protective Claim for 2009 FICA Taxes is April 15, 2013”,
McBrayer Employment Law (April 3, 2013); Gail Goodman & Erwin D. Kratz, “ERISA and
Employee Benefits Update” Fennemore Craig Attorneys (Feb. 20, 2013); Daved
E. Rogers, Ruth Wimer, Esq., CPA, “Quality Stores Decision Could Lead to
Significant Refunds of FICA Tax”, McDermott Will & Emery (Sept. 19,
2012). Thus, in the run up to the recent
April 15 tax filing deadline, many tax lawyers were advising their employer
clients to file said forms on or before April 15, 2013, for any FICA payments
made during 2009, the statute of limitations being three years. Accordingly, it seems to me that employee
counsel in settlement negotiations of severance claims should insist, as a
condition of settlement, that the employer file such a protective claim so
that, in the event the Supreme Court eventually resolves the Circuit split, and
resolves it in the taxpayers’ favor, the employee would be in a position to
obtain a refund of his/her share of FICA taxes.
The Quality Stores
decision suggests that there are five conditions that may need to be met in
order for such payments to be treated, not as “wages”, but rather as SUB payments. Those five conditions are as follows:
- An amount paid to an employee;
- Pursuant to an employer’s plan;
- Because of an employee’s involuntary separation from employment, whether temporary or permanent;
- Resulting from a reduction in force, the discontinuance of a plant or operation, or other similar conditions; and
- Is included in the employee’s gross income.
As Ms. Vicki Nielsen
of Ogletree Deakins indicates in her blog on this subject, referenced above, whether a formal
ERISA severance plan would be a pre-condition for SUB treatment is very much an
open question.
Disclaimer:
Robert B. Fitzpatrick, PLLC, is
not a tax law firm, and does not practice or provide legal advice regarding tax
law. The information contained herein is
general in nature and based on authorities that are subject to change. Robert
B. Fitzpatrick, PLLC guarantees neither the accuracy nor completeness of any
information and is not responsible for any errors or omissions, or for results
obtained by others as a result of reliance upon such information. Robert B.
Fitzpatrick, PLLC assumes no obligation to inform the reader of any changes in
tax laws or other factors that could affect information contained herein. This
publication does not, and is not intended to, provide legal, tax or accounting
advice, and readers should consult their tax advisors concerning the
application of tax laws to their particular situations. This analysis is not
tax advice and is not intended or written to be used, and cannot be used, for
purposes of avoiding tax penalties that may be imposed on any taxpayer.
Please be sure to visit our website at http://RobertBFitzpatrick.com
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