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United States v. Quality Stores, Inc., Et. al.

Summarized by: 

Date Filed: March 25, 2014
Case #: 12-1408
KENNEDY, J., delivered the opinion of the Court, in which all other Members joined, except KAGAN, J., who took no part in the consideration or decision of the case.
Full Text Opinion: http://www.supremecourt.gov/opinions/13pdf/12-1408_6468.pdf

Tax Law: Severance payments are taxable wages under the Federal Insurance Contributions Act.

Respondent Quality Stores, Inc., an agricultural-specialty retailer, made severance payments to employees who were terminated after Respondent went through a Chapter 11 bankruptcy. Respondent paid taxes required under the Federal Insurance Contributions Act (FICA). However, later Respondent believed the payments should not have been taxed as wages under FICA. Respondent requested a refund from the IRS. The IRS did not allow or deny the refund, and Respondent initiated proceedings in the Bankruptcy Court. The Bankruptcy Court found in favor of Respondent. The District Court and the Sixth Circuit affirmed, holding severance payments are not wages.

The Court of Appeals relied on a section of the Internal Revenue Code governing income tax withholding. The United States Supreme Court concluded this was incorrect. Instead, the Supreme Court relied on the definition of "wages" under FICA. FICA defines "wages" as "all remuneration for employment, including the cash value of all remuneration (including benefits) paid in any medium other than cash."

Here, the severance payments were made to terminated employees, and not linked to unemployment benefits. Thus, the severance payments were taxable wages, and the Court of Appeals decision is reversed.