On October 18, 2012, the U.S. Department of Justice filed a petition for rehearing en banc in the Sixth Circuit Court of Appeals in United States v. Quality Stores, Inc., No. 10-1563 (September 7, 2012), asking the full court to reverse the panel decision. The panel held that Federal Insurance Contributions Act (FICA) taxes do not apply to any severance payments that satisfy the Internal Revenue Code’s statutory definition of “supplemental unemployment compensation benefits.” For a more detailed analysis of the Quality Stores decision, read more here.
The petition provides as follows:
This case is of exceptional importance. The panel’s ruling directly conflicts with CSX Corp. v. United States, 518 F.3d 1328 (Fed. Cir. 2008), which held that supplemental unemployment compensation benefits are wages subject to FICA tax. There are also numerous lawsuits and administrative refund claims pending that involve the identical issue. Eight refund suits are pending in the district courts with a total of over $120 million at issue. The Internal Revenue Service (“IRS”) has suspended action on administrative refund claims totaling over $127 million from approximately 800 taxpayers within the jurisdiction of the Sixth Circuit. Total amount currently at issue, taking into consideration similar cases and related claims filed with the IRS, is over $1 billion.
Petition for Rehearing
In the petition for rehearing en banc, the government argues that the Sixth Circuit panel erred in two key respects. “First, it failed to address the actual FICA question here based on its erroneous belief that Coffy [v. Republic Steel Corp] establishes that SUB pay is not wages for FICA purposes.” On this point, the government argues that the Sixth’s Circuit decision conflicts with the U.S. Supreme Court’s decision in Social Security Board v. Nierotko and two prior Sixth Circuit decisions holding that wages for FICA purposes were not limited to compensation for work performed.
The second error asserted in the rehearing petition is that, “in construing I.R.C. § 3402(o), the panel failed to recognize that the section’s applicability is expressly limited to income-tax withholding, which was a key factor in the Federal Circuit’s CSX decision.” On this point, the government argues that Congress did not intend section 3402(o) to be applied outside the income tax withholding context and that Rowan Cos. v. United States, which held that the definition of wages should be interpreted consistently in the FICA and income tax withholding contexts, does not provide a basis for “skirting” the section 3402(o) limiting language.
If the Sixth Circuit does not grant rehearing en banc or issues an en banc opinion that is still favorable to the taxpayer, the government can still, and given the magnitude of the dollars at stake, likely will, seek review by the U.S. Supreme Court.
Impact on FICA Tax Refund Claims
The ultimate resolution of this issue is several years away. However, for employers to preserve their rights to a FICA tax refund, they must file a refund claim before the applicable statute of limitations expires. For that reason, any employer that implemented reductions in force or layoffs after 2008 should consider filing refund claims for FICA taxes paid on severance, if they haven’t done so already. The statute of limitations for severance paid prior to 2009 has expired. The statute of limitations for severance paid in 2009 expires on April 15, 2013.
In its petition to the Sixth Circuit, the government indicates that the IRS is holding refund claims in the Sixth Circuit in abeyance, pending the final resolution of the Quality Stores case. The IRS can, and may be, denying refund claims outside the Sixth Circuit, which encompasses Kentucky, Michigan, Ohio, and Tennessee. If the IRS denies an employer’s refund claim, the employer has two years to file a refund suit in court, unless it extends that time (and continues to preserve its right to a refund) by filing a Form 907 “Agreement to Extend the Time to Bring Suit” with the IRS, before the expiration of the two-year period. Employers who have received refund claim denials should keep the refund denial letters in their records and track the deadline for filing Form 907s so that the employer is able to file the Form 907s before the applicable two-year period expires.