In a win for the Obama administration and the U.S. Internal Revenue
Service, the court voted 8-0 that Quality Stores Inc., a defunct
retailer, and its employees are not entitled to tax refunds totaling
about $1 million.
The tax refund at issue was small, but the IRS said the stakes in
the case were huge because, if Quality Stores had won, thousands
more refund claims could have resulted, possibly totaling as much as
If Quality Stores had won, many companies were ready to file for tax
refunds, said Ruth Wimer, a partner at the law firm McDermott Will &
Emery LLP, calling the decision "bad news" for employers and
The dispute centered on whether severance paid to involuntarily
terminated workers was taxable under the Federal Insurance
Contributions Act tax, or FICA, which helps pay for Social Security
pensions and Medicare health insurance for the aged. FICA tax is
paid by a company and its employees.
In September 2012, the 6th U.S. Circuit Court of Appeals ruled that
Quality Stores' severance payments to its former employees were not
wages and so were not taxable under FICA.
That decision was overturned by the Supreme Court, with Justice
Elena Kagan recused in the case. "Under FICA's broad definition,
these severance payments constitute taxable wages," said Justice
Anthony Kennedy, in an 18-page opinion.
SEVERANCE IN TAX GRAY AREA
Quality Stores served farmers and small-town people in 300
locations. It declared bankruptcy in 2001 and laid off thousands of
workers with severance pay. The company withheld FICA tax from the
severance and sent the withholdings to the IRS.
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In oral arguments before the high court in January, the IRS and
Quality Stores argued over seemingly contradictory language in the
tax code related to severance pay and FICA taxes.
One part of the code defines wages as "all remuneration for
employment." But in a different code section, "supplemental
unemployment benefits (SUB)" are exempted from income taxes.
Quality Stores argued that its severance payments were exempt from
FICA tax under the "SUB payments" definition.
The Supreme Court dismissed this argument.
"Severance payments are not exempted, and they squarely fall within
the broad textual definition of wages for purposes of income-tax
withholding," the court said.
(Editing by Kevin Drawbaugh and Grant McCool)
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