The Government recently filed a petition for the Supreme Court to review the United States v. Quality Stores case. If granted, the Supreme Court will decide whether severance payments that meet the statutory definition of supplemental unemployment compensation benefit payments (“SUB Payments”) are subject to FICA. SUB Payments are amounts paid to an employee pursuant to the employer’s plan because of the employee’s involuntary separation resulting from a reduction in force or discontinuance of a plant or operation. In Quality Stores, the Sixth Circuit held such payments are not subject to FICA taxation. The Sixth Circuit’s holding is contrary to a prior decision of the Federal Circuit and published IRS guidance. The taxpayer has until July 31, 2013 to file its response. The Supreme Court is unlikely to decide whether to review the Quality Stores decision before Fall 2013.
The IRS has been disallowing claims for FICA tax refunds filed by taxpayers based on Quality Stores. Following a disallowance, taxpayers generally have two years to bring suit to recover FICA taxes paid. Recently, the IRS has indicated that it will extend the two-year period to bring suit.
Employers who made severance payments in 2010 or later should consider filing protective claims for a FICA tax refund. In addition, employers whose FICA refunds claims were denied and whose two-year window to file suit is approaching should request an extension of time to file suit.