* Decision is a win for Obama administration and IRS
* Tax agency feared loss would mean refund request wave
(Adds lawyer comment, background, case details)
By Lawrence Hurley and Patrick Temple-West
WASHINGTON, March 25 The U.S. Supreme Court
ruled on Tuesday that taxes are due for Social Security and
Medicare on severance packages paid to workers who are laid off
involuntarily, overturning a lower court ruling that could have
led to a wave of payroll tax refund requests from U.S.
In a win for the Obama administration and the U.S. Internal
Revenue Service, the court voted 8-0 that Quality Stores Inc., a
defunct retailer, and its employees are not entitled to tax
refunds totaling about $1 million.
The tax refund at issue was small, but the IRS said the
stakes in the case were huge because, if Quality Stores had won,
thousands more refund claims could have resulted, possibly
totaling as much as $1 billion.
If Quality Stores had won, many companies were ready to file
for tax refunds, said Ruth Wimer, a partner at the law firm
McDermott Will & Emery LLP, calling the decision "bad news" for
employers and employees.
The dispute centered on whether severance paid to
involuntarily terminated workers was taxable under the Federal
Insurance Contributions Act tax, or FICA, which helps pay for
Social Security pensions and Medicare health insurance for the
aged. FICA tax is paid by a company and its employees.
In September 2012, the 6th U.S. Circuit Court of Appeals
ruled that Quality Stores' severance payments to its former
employees were not wages and so were not taxable under FICA.
That decision was overturned by the Supreme Court, with
Justice Elena Kagan recused in the case. "Under FICA's broad
definition, these severance payments constitute taxable wages,"
said Justice Anthony Kennedy, in an 18-page opinion.
SEVERANCE IN TAX GRAY AREA
Quality Stores served farmers and small-town people in 300
locations. It declared bankruptcy in 2001 and laid off thousands
of workers with severance pay. The company withheld FICA tax
from the severance and sent the withholdings to the IRS.
In oral arguments before the high court in January, the IRS
and Quality Stores argued over seemingly contradictory language
in the tax code related to severance pay and FICA taxes.
One part of the code defines wages as "all remuneration for
employment." But in a different code section, "supplemental
unemployment benefits (SUB)" are exempted from income taxes.
Quality Stores argued that its severance payments were
exempt from FICA tax under the "SUB payments" definition.
The Supreme Court dismissed this argument.
"Severance payments are not exempted, and they squarely fall
within the broad textual definition of wages for purposes of
income-tax withholding," the court said.
(Editing by Kevin Drawbaugh and Grant McCool)