2006 FICA Refund Claims Due April 15, 2010

On February 23, 2010, the taxpayer won its FICA tax refund suit for severance again in Quality Stores1 when its bankruptcy court victory was affirmed. This victory reanimated the issue of whether FICA tax is due on certain kinds of severance payments. It provides further support for existing taxpayer refund claims (which often run into the millions of dollars) and provides a catalyst to protecting claims for 2006. The Quality Stores opinion is of particular interest to all employers who have implemented significant reductions in workforce due to the economy in recent years. The government undoubtedly will appeal the loss. For those unfamiliar with the issue and its history, we summarize both as follows.

The Issue

The question answered in Quality Stores is whether payments made to employees pursuant to certain severance programs are “wages” for purposes of federal employment taxation.2 The federal district court in Quality Stores upheld the bankruptcy court decision that the taxpayer’s severance payments met the definition of “supplemental unemployment compensation,” which is excluded from the statutory definition of “wages” and, therefore, not subject to FICA taxes. To be supplemental unemployment compensation, a severance payment must simply be: (i) paid pursuant to an employer plan; (ii) as a result of an employee’s involuntary separation; and (iii) as a consequence of a reduction in force, a plant closing, discontinuance of an operation, or some similar event or condition.3

A Brief History

The decision in Quality Stores comes nearly two years after the Federal Circuit Court of Appeals issued its opinion in CSX in the government’s favor, and reversing the Court of Federal Claims decision in favor of the taxpayer.4 In the six years5 following the Court of Federal Claims’ decision for the taxpayer, a multitude of taxpayers filed protective FICA refund claims. Since the Federal Circuit’s reversal in 2008, the IRS has begun issuing notices of claim disallowance to many of those taxpayers. Following a notice of claim disallowance, taxpayers generally have two years to file suit in court to further pursue their refund claims. In light of the Quality Stores decision, many taxpayers are now deciding whether to pursue their refund claims in court.

What To Do

Have you paid a significant amount of severance pursuant to an employer plan to an employee who was involuntarily separated due to a reduction in force, a plant closing, discontinuance of an operation, or some similar event or condition? If so, you may want to estimate the FICA tax paid and consider filing a protective claim for all open years. Unless your statute of limitations for a refund of employment taxes6 is open for some other reason (e.g., by agreement or a subsequent payment), the claim must be filed by April 15 of the fourth year following the year for which the tax is paid. Thus, a claim for FICA taxes paid for 2006 must be filed by April 15, 2010.

Note: The taxpayer that prevailed in Quality Stores was a debtor in a Chapter 11 involuntary bankruptcy proceeding. Similarly situated taxpayers and bankruptcy trustees might want to consider whether to pursue tax refund claims in light of the Quality Stores decision. We have represented numerous clients in these claims and in their litigation and we continue to do so. Our experts are ready to discuss your questions and concerns.