The United States Sixth Circuit Court of Appeals recently decided that severance payments received by employees upon termination of employment are not taxable as wages for FICA tax purposes under the Internal Revenue Code. See In re Quality Stores, Inc. et al, 110 AFTR 2d 2012-XXXX (6th Cir.)* The Court reasoned that severance payments are made to compensate for lost future earnings because the job has been lost rather than as wages received or paid in exchange for the performance of services.
The Sixth Circuit’s opinion causes the following observations:
IRC §3402(o) applies when severance payments are made “…pursuant to a plan to which the employer is a party, because of an employee’s voluntary separation from employment…resulting directly from a reduction in force, the discontinuance of a plant or operation, or other similar conditions…”
Query whether job termination qualifies as “other similar conditions” in the instance of a single individual?
Quality Stores filed IRS Forms 843 on behalf of both its consenting employees and itself but not for non-consenting employees.
The opinion is very well written and reasoned, which certainly justifies filing protective refund claims by either employees or employers. The time for filing an employer’s refund claim should be governed by IRC §6501(b)(3), which would apply to all calendar year 2009 quarters and later years, with a deadline of April 15, 2013 for all 2009 quarters.
An employer could file a protective refund claim both for itself and its consenting employees. A claim must be filed for each quarter in which an overpayment is believed to exist. An employee’s consent covers the employee’s portion only and is not needed for the employer’s matching contribution or FICA payment.
The employee could also file a separate refund claim as well. But, certain statements must be alleged by the employee including that the employer has not reimbursed him.
As mentioned, the United States has 60 days after entry of judgment to file an appeal in the Quality Stores case. Because of a split in the United States Circuit Courts of Appeal, we should expect an appeal. Meanwhile, it may be prudent to file protective refund claims, for 2009 quarters, especially for those taxpayers subject to the jurisdiction of the United States Sixth Circuit Court of Appeals, which includes Ohio.
Please contact David J. Lewis at 330-436-5300 concerning this article.
*Opinion has not been published; therefore page numbers remain as XXXX.