25 March 2014

Law in Plain English: United States v. Quality Stores, Inc.

This is one in a series of posts designed to describe court decisions in plain English. For more detail and background on the legal issues, see the link to the case below. For similar posts, click here.

SCOTUSblogUnited States v. Quality Stores, Inc.

Argument: Jan 14 2014 (Aud.)

Why did the Supreme Court take this case? In this case, the Sixth Circuit held that payments Quality Stores made to its employees upon terminating their employment involuntarily due to business cessation constituted supplemental unemployment compensation benefits that are not taxable as wages under FICA. On the other hand, the Federal Circuit ruled in an earlier case that such payments are subject to taxation. So-called "circuit splits" are perhaps the most common way cases make it to the Supreme Court.

Background: Quality Stores was the largest agricultural-specialty retailer in the country serving farmers, hobby gardeners, skilled trade persons, and do-it-yourself customers. Following an involuntary Chapter 11 bankruptcy petition, Quality Stores closed sixty-three stores and nine distribution centers and terminated the employment of approximately seventy-five employees in the corporate office. Quality Stores made severance payments to those employees whose employment was involuntarily terminated. Because the severance payments constituted gross income to the employees for federal income tax purposes, Quality Stores reported the payments as wages on W-2 forms and withheld federal income tax. Although Quality Stores collected and paid the FICA tax, it did not agree with the Internal Revenue Service (IRS) that the severance payments constituted wages for FICA purposes. Quality Stores filed with the IRS seeking the refund of $1,000,125 in FICA tax. When the IRS did not allow or deny the refund claims, Quality Stores filed an adversary action in the bankruptcy court. The bankruptcy court ordered a full refund, holding that payments Quality Stores made to its employees upon terminating their employment involuntarily due to business cessation constituted supplemental unemployment compensation benefits that are not taxable as wages under FICA. The District Court and the Sixth Circuit both affirmed.

Issue: The question before the Court is whether severance payments made to employees whose employment was involuntarily terminated are taxable under the Federal Insurance Contributions Act.

Holding: In a unanimous decision (with Justice Kagan not participating), the Supreme Court ruled that the severance payments at issue are taxable wages for FICA purposes.
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