Jeffrey M. Rosenblum, P.C.
A Fresh Start

U.S. SUPREME COURT RULES THAT SEVERANCE PAY CAN BE TAXABLE

"(Bloomberg) The U.S. Supreme Court decided in favor of the Obama administration in a dispute over taxes on severance compensation, overturning a lower court decision that could have forced the IRS to refund more than $1 billion.

The court said payments to laid-off workers are subject to Social Security and Medicare taxes under the Federal Insurance Contributions Act, or FICA. It was a victory for the Internal Revenue Service, which has been fighting more than 2,400 refund claims from companies and their ex-employees.

The justices' unanimous ruling yesterday came in the case of Quality Stores Inc., once the country's largest agricultural specialty retailer. The defunct company fired 3,100 workers when it closed its stores in 2001 and 2002, paid the taxes on their severance and then asked a bankruptcy judge to order the IRS to refund $1 million.

Writing for the court, Justice Anthony Kennedy said the payments were subject to tax. He rejected the company's contention that what it called supplemental unemployment compensation was exempt from the FICA.

"The severance payments here were made to employees terminated against their will, were varied based on job seniority and time served and were not linked to the receipt of state unemployment benefits," he wrote. "Under FICA's broad definition, these severance payments constitute taxable wages."

Unresolved Lawsuits
Lower courts were divided on the issue. The high court ruling came in the government's appeal of a September 2012 decision by a Cincinnati-based U.S. appeals court that said Quality Stores was entitled to a refund. The money would have gone to 1,850 ex-employees who paid their share of the taxes and authorized Muskegon, Michigan-based Quality Stores to try to recoup the payments on their behalf.

"The decision is a huge blow for employers and employees alike," said Bob Hertzberg, the lawyer who represented Quality Stores at the Supreme Court. "In addition to the impact on Quality Stores and its former employees, this ruling has far-reaching implications for the thousands of other organizations and workers fighting for refunds."

Kathryn Keneally, head of the Justice Department's tax division, said the government is "pleased that the Supreme Court recognized that there should be no difference in how severance pay is taxed for social security and income tax purposes."

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