Friday, April 19, 2013

Parties Settling Employment Reduction-in-Force Disputes Should Take Into Account Circuit Split on FICA Taxes

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:
  1. An amount paid to an employee;
  2. Pursuant to an employer’s plan;
  3. Because of an employee’s involuntary separation from employment, whether temporary or permanent;
  4. Resulting from a reduction in force, the discontinuance of a plant or operation, or other similar conditions; and
  5. 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. 


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.

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