In oral arguments before the high court, the Obama administration
will ask the justices to overturn an appeals court ruling in favor
of issuing a tax refund to Quality Stores Inc, a rural retailer that
declared bankruptcy in 2001.
Though the tax refund at issue in this case is small — about $1
million — the Obama administration has warned in court filings that
the Internal Revenue Service could owe more than $1 billion in
thousands of tax refund claims to individuals and businesses if the
appeals court ruling is upheld.
At issue is whether severance payments to workers who were
involuntarily terminated are taxable under the Federal Insurance
Contributions Act tax, or FICA, which helps pay for Social Security
retirement pensions and Medicare health insurance for the aged. FICA
taxes are paid by a company and its employees.
Midwest-based Quality Stores served mainly farmers and people in
small towns before it shuttered all of its 300 stores. Thousands of
workers were laid off with severance pay. The company withheld FICA
tax from the severance pay and forwarded the withholdings to the
In the case before the Supreme Court, the IRS and Quality Stores are
arguing over seemingly contradictory language in the tax code
related to severance pay and FICA taxes.
SEVERANCE IN TAX GRAY AREA
One part of the tax code defines wages as "all remuneration for
employment." The severance payments made by Quality Stores were
wages and were taxable for FICA purposes, the Obama administration
is arguing, according to court filings.
But in a different section of the code, "supplemental unemployment
benefits" are exempted from income taxes. Quality Stores has argued
that its severance payments are exempt from FICA taxes according to
the "SUB payments" definition.
In September 2012, the 6th U.S. Circuit Court of Appeals ruled that
the Quality Stores severance payments to former employees were not
wages, and therefore were not taxable under FICA.
In that decision, now before the Supreme Court, the 6th Circuit
judges acknowledged the tax code language is "complex" and "the
correct resolution of the issue is far from obvious."
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Kristin Hickman, a law professor at the University of Minnesota,
said: "Both sides have plausible arguments about how the statutes
can be interpreted."
OUTCOME HARD TO PREDICT
U.S. Deputy Solicitor General Eric Feigin will argue the case for
the government. Quality Stores will be represented by Robert
Hertzberg, a lawyer with Pepper Hamilton LLP, who will be making his
first Supreme Court appearance.
Hundreds of the company's creditors are paying for legal fees in
this case from a bankruptcy trust.
Only eight of the nine justices will hear the oral arguments.
President Barack Obama's most recent court appointee, Justice Elena
Kagan, is not taking part in the case. She has been sitting out
administration disputes from when she served as U.S. solicitor
general before her August 2010 court appointment.
A decision is expected by the end of June. Views were mixed on how
the case might be decided.
"The court will be fairly unified and sympathetic to the
government," said Bradley Joondeph, professor at the Santa Clara
University School of Law.
Ruth Wimer, a partner at McDermott Will & Emery LLP, said Quality
Stores has an advantage because the government's argument is too
simplistic. "The government has a harder argument," Wimer said. "If
the statute were clear, we wouldn't have all these cases."
The case is United States v. Quality Stores Inc. No. 12-1408.
(Editing by Kevin Drawbaugh and Jonathan Oatis)
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