SCOTUSblog: United States v. Quality Stores, Inc.
Argument: Jan 14 2014 (Aud.)
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.