January 15, 2014
The Supreme Court heard oral argument on January 14 in Quality Stores. Whether it was because of a lack of interest in the subject matter or because it was the third argument of the day at the unusually late hour of 1:00 (the Court’s usual schedule in recent years calls for two (sometimes only one) arguments in the morning that finish before lunch), the Court was less active than usual in its questioning. Indeed, the government’s counsel began to sit down after using only five of his allotted 30 minutes for his opening argument (though he was then persuaded to remain at the podium by some additional questions). By the end, all of the Justices except Justice Thomas participated, and the advocates for each side had to deal with some hostile questions. The questioning was not so one-sided as to make the outcome a foregone conclusion, but the Court seemed to be leaning more towards the government’s position than the taxpayer’s. On the other hand, the Court seemed to be learning some of the nuances of the case as the argument proceeded, so there is the possibility that the views of some Justices could yet shift from where they appeared to be at oral argument.
Eric Feigin began the argument for the government, and he was allowed to make his basic presentation without interruption – namely, that the severance pay here comes within the broad definition of FICA wages and the Court should not have to worry about the text of section 3402(o), the income tax withholding statute on which the taxpayer relies. On the latter point, Justice Ginsburg interrupted to ask about the statement in Rowan indicating that wages should be interpreted the same way for FICA and income tax withholding. Mr. Feigin gave two responses: 1) Rowan does not say that the income tax statute should govern the substance of the FICA statute; and 2) the basic principle of Rowan is to establish congruence between FICA “wages” and income tax withholding “wages” for purposes of administrability, and that goal would be advanced by adopting the government’s position.
After Mr. Feigin described the background of the 1969 income tax withholding legislation, Justice Kennedy asked about the history of FICA withholding of supplemental unemployment benefits. Mr. Feigin responded that there is no FICA withholding of SUB payments, apparently referring to the government’s narrow definition of SUB payments that the revenue rulings exempt from FICA wages, rather than the broader concept of SUB payments as defined in section 3402(o). The Chief Justice then asked him to clarify the reason for the enactment of section 3402(o), and Mr. Feigin explained that the benefits were considered to be taxable income even if not subject to withholding. At that point, Mr. Feigin stated that he was prepared to sit down unless there were further questions. That suggestion proved to be premature, as it turned out that there were several Justices who still had questions.
Justice Ginsburg began by asking about the effect on state unemployment compensation. That question arises from the fact that some states will not pay unemployment compensation if the employee is receiving “wages,” even if the employee is out of work. To avoid having individuals in those states lose their state unemployment benefits as a result of receiving SUB payments from their employer, the IRS has drawn a strange distinction in its revenue rulings, currently providing that SUB payments must be “linked to state unemployment compensation in order to be excluded from the definition” of FICA wages. Rev. Rul. 90-72. That distinction is policy-driven, but makes no logical sense as an interpretation of the statutory text. Mr. Feigin sought at first to steer away from this problem by saying that the government was arguing for the status quo, so nothing would change. He added, however, that “if the court were to reach some other conclusion in this case than the one the government is urging” (which appears to be a reference to the possibility that the Court’s decision would wipe out the distinction in the revenue ruling), then that might have an effect on state unemployment benefits. The states, he argued, could then cure any problems by amending state law.
After a short response to Justice Kennedy’s question about whether some employees might prefer to have these payments treated as FICA wages, Mr. Feigin again began to sit down. This time Justice Alito asked whether it would make a difference if the payments were not keyed to length of service. Mr. Feigin responded that the government’s position would be the same. Justice Alito then followed up by citing the Coffy case and asking why the distinction drawn there “between compensation for services and payments that are contingent on the employee’s being thrown out of work” was not applicable. Mr. Feigin replied that the cases involved different issues and different definitions. He went on to argue that FICA does not distinguish “between payments that are part of the continuing employment and payments that occur at the end of the employment relationship,” stating that FICA wages include retirement pay and dismissal payments. At that point, Mr. Feigin again offered to end his presentation and was permitted to sit down after 12 minutes of argument.
Robert Hertzberg argued for the taxpayer and began by arguing that the SUB payments were not “remuneration for services” – and hence not FICA wages – because, as stated in Coffy, they were contingent on losing one’s job. Justice Sotomayor asked the first question, inquiring whether the taxpayer could prevail if the Court invalidated the government’s “regulation” (likely a reference to the applicable IRS revenue rulings). This question appears to have been prompted by the heavy criticism of the IRS rulings, particularly in the amicus briefs, with Justice Sotomayor wanting to put aside the rulings and focus on the statute. Mr. Hertzberg replied that the taxpayer should prevail because the statutory language is clear, and the FICA and income tax withholding statutes should have the same meaning under Rowan. Both Justices Sotomayor and Ginsburg then suggested that it would be simpler and more appropriate to have the SUB payments treated the same way under the two statutes. Mr. Hertzberg replied that they were not “wages” under the statute. He added that different treatment made sense because the SUB payments are provided as a “safety net” and logically ought not to be reduced by FICA taxation in order to fund Medicare and Social Security.
Justice Scalia pointed out that the payments are “for faithful and good past services” because they are paid only to employees, and this comment led to a bevy of questions from all sides. Justice Ginsburg remarked that there “are some severance payments that do count for FICA purposes,” even under the taxpayer’s position. Justice Alito asked what would happen if section 3402(o) did not exist. Mr. Hertzberg replied that the term “supplemental unemployment benefits” has its own definition, going back to 1960 legislation dealing with trusts, and those benefits have not been regarded as FICA wages, even in the 1977 revenue ruling. He then emphasized that Congress reenacted the FICA statute in 1986 against that backdrop, and therefore that payments falling within the existing definition of SUB payments should not be within FICA wages.
Justice Breyer then objected that the FICA definition is very broad. With respect to income tax withholding, he questioned whether section 3402(o) shouldn’t be viewed as just being enacted to be on the safe side, but not necessarily indicating that Congress had concluded that SUB payments were not FICA wages. Mr. Hertzberg responded that it was clear from the text, the title of the section, and the legislative history that Congress did not understand SUB payments to fall within FICA wages. This triggered Justice Ginsburg to ask again what is the distinction between “dismissal payments” that are subject to FICA and those that are not. After Mr. Hertzberg described that distinction (that SUB payments must come from a plan and follow a mass layoff or plant closing), Justice Breyer came back to his question. Acknowledging now that Congress in 1969 probably did not view the SUB payments as FICA wages when it passed section 3402(o), he asked why that should be given weight in construing the FICA statute passed earlier by a different Congress. Mr. Hertzberg replied that the statutes were reenacted together in 1986, and therefore it was not just a matter of a later Congress commenting on what an earlier Congress had passed. Justice Breyer’s followup comment, however, indicated that he either did not understand or was not persuaded by this answer, as he noted that the statute was passed because there was “authority saying it wasn’t wages,” but the authority was not necessarily correct.
Justice Alito then asked about the government’s argument that the “treated as” language in section 3402(o) was necessary because the IRS had ruled that some SUB payments are not wages, but it did not mean that all such payments were not wages. Mr. Hertzberg replied that the language of 3402(o) was clear, particularly the title, which addresses payments “other than wages.” The argument closed with Justice Scalia promising to ask the government on rebuttal about Mr. Hertzberg’s point that, given the reenactment of both statutes at the same time, it appeared that section 3402(o) is superfluous under the government’s position.
Mr. Feigin begin his rebuttal by addressing Justice Sotomayor’s question about how the Court should approach the case if the IRS revenue rulings are invalid. He said that this would not affect the outcome of this case because the defect in the rulings would be that they exclude some SUB payments from wages, when in fact all such payments should be included. That is, any problem would be cured by making even more SUB payments subject to FICA taxation. Justice Sotomayor replied that this answer was “touching at what I was thinking,” and then asked Mr. Feigin to address Justice Scalia’s point about 3402(o) being superfluous. Mr. Feigin began by acknowledging that “the revenue rulings are not consistent with the statutory text of FICA.” He attributed this defect to the fact that the rulings trace back to a “more freewheeling time in the history of statutory interpretation.”
Justice Scalia then jumped in to bring the discussion back to whether section 3402(o) was unnecessary, stating that the statute “contradicted itself” if the government’s position were correct. Mr. Feigin responded by making the same point that Justice Alito had made earlier (also reflected in the Federal Circuit’s CSX decision) that there was no contradiction if section 3402(o) was drafted as it was because there were some SUB payments that were not wages under the revenue ruling. Justice Scalia found that response unsatisfying since the title clearly refers to payments “other than wages.” Mr. Feigin answered by saying that the title refers to “certain payments” and the statute provides that they should be “treated as wages for a payroll period.” He then went on to reiterate his prior points about the history of the development of section 3402(o) and argued that it was drafted as it was to cover the possibility that the IRS would draw different distinctions in the future regarding which SUB payments constitute “wages.”
Finally, this discussion prompted Justice Ginsburg and Chief Justice Roberts to revisit the IRS revenue rulings, which the Chief Justice characterized as taking a narrower view of the FICA definition than the government was arguing for. Mr. Feigin responded that the rulings were not directly at issue here, but if the Court thought it had to rule on them, it should follow the government’s current arguments regarding the statutory text “notwithstanding the revenue rulings.” He then again assured Justice Ginsburg that the states could fix any bad results related to their own unemployment compensation schemes that might ensue from invalidating the revenue rulings.
It is always tricky to forecast a Supreme Court decision based on the oral argument. Still, it cannot have been encouraging for the taxpayer that its counsel was the recipient of most of the difficult questioning, with Justices Sotomayor and Breyer in particular seeming to exhibit agreement with the government’s position. On the other hand, as noted above, the Court appeared still to be digesting some of the complexities of this case, so the positions reflected at oral argument are not set in stone. For example, Justice Scalia showed more skepticism of the government’s position during rebuttal than he did during Mr. Feigin’s opening argument. Time will tell. A decision is expected this spring, likely issuing sometime between late March and early June. If the vote on the Court is 4-4, however (with Justice Kagan being recused), then the Court will announce that outcome as early as next week. That is because there will be no need to write an opinion; the result will just be a one-line announcement that the decision has been affirmed by an equally divided Court.