United States v. Quality Stores, Inc.

Quality Stores made severance payments to employees who were involuntarily terminated in its Chapter 11 bankruptcy. The payments were made pursuant to plans that did not tie payments to the receipt of state unemployment insurance and varied based on job seniority. Quality Stores paid and withheld taxes required under FICA, 26 U.S.C. 3101. Later, believing that the payments should not have been taxed as FICA wages, Quality Stores sought a refund on behalf of itself and about 1,850 former employees. The IRS neither allowed nor denied the refund, Quality Stores initiated proceedings in the Bankruptcy Court, which granted summary judgment in its favor. The district court and Sixth Circuit affirmed. The Supreme Court reversed, finding that the severance payments were taxable FICA wages. FICA defines “wages” broadly as “all remuneration for employment.” Severance payments are a form of remuneration made only to employees in consideration for employment. By varying according to a terminated employee’s function and seniority, the Quality Stores severance payments confirm the principle that “service” “mea[ns] not only work actually done but the entire employer-employee relationship for which compensation is paid.” FICA’s exemption for severance payments made because of "retirement for disability,” would be unnecessary were severance payments generally not considered wages. FICA has contained no general exception for severance payments since 1950. The Internal Revenue Code, section 3401(a), also has a broad definition of “wages” and specifies that “supplemental unemployment compensation benefits,” which include severance payments, be treated “as if” they were wages; simplicity of administration and consistency of statutory interpretation indicate that the meaning of “wages” should generally be the same for income-tax withholding and for FICA calculations. View "United States v. Quality Stores, Inc." on Justia Law