March 25, 2014
The Supreme Court today ruled 8-0 in favor of the government in the long-running Quality Stores litigation, holding that severance payments are taxable FICA wages, even if they fall within the category of “supplemental unemployment compensation benefits” that are subject to income tax withholding under Code section 3402(o). See our prior coverage here. The Court’s opinion closely tracks the arguments made by the government in its brief.
The Court began by analyzing the definition of “wages” in the FICA statute, which it repeatedly characterizes as “broad.” That definition — “remuneration for employment” — appears to encompass the payments at issue because “common sense dictates that the employees receive the payments ‘for employment.'” Specifically, they are paid only to employees and often vary according to the function and seniority of the particular employee who is terminated. The Court buttressed this statutory interpretation by pointing both to other aspects of the statutory definition and to its history. In particular, the Court noted that Code section 3121(a)(13(A) exempts severance payments made because of “retirement for disability” and that exception would appear superfluous if “wages” did not generally encompass severance payments. The Court also observed that in 1950 Congress had repealed a statutory exception for “dismissal payments,” thus suggesting that severance payments are not meant to be excepted from FICA “wages.”
The Court then turned to responding to the taxpayer’s argument that a contrary inference must be drawn from the treatment of SUB payments in the income tax withholding statute — specifically, that section 3402(o) directs that income tax should be withheld from such payments “as if” they were wages, which indicates that they are not in fact “wages.” The Court found this provision “in all respects consistent with the proposition that at least some severance payments are wages,” citing to the Federal Circuit’s analysis of the textual issue in the CSX case. The Court did not reject out-of-hand the taxpayer’s reliance on the heading of section 3402(o), which refers to “certain payments other than wages,” but said that the heading “falls short of a declaration that all the payments listed in section 3402(o) are not wages.”
The Court then embarked on a detailed discussion of the regulatory background against which section 3402(o) was enacted in order to demonstrate why it should not be understood as reflecting a Congressional determination that SUB payments are not FICA “wages,” despite the contrary inference that might logically be drawn from its text standing alone. Briefly, the Court explained that Congress was solely focused on solving a withholding conundrum created by the regulatory treatment of SUB payments when SUB plans proliferated in the 1950s. The IRS sought to impose income tax on these payments, but it did not want to characterize them as “wages” because that would have caused state unemployment benefit payments to stop in some cases (because some states would not pay unemployment compensation to people receiving “wages”). As a result, some individuals were being hit with big tax bills at the end of the year. Congress wanted to implement withholding for such payments and crafted section 3402(o) broadly so as to cover a spectrum of payments without regard to whether they qualified as FICA “wages.” Accordingly, the Court concluded that section 3402(o) sheds no light on the definition of FICA “wages.”
The Court added that its approach is consistent with its 1981 decision in Rowan, which had been invoked to support the taxpayer’s position. The Court stated that the government’s position, not the taxpayer’s, best advanced “the major principle recognized in Rowan: that simplicity of administration and consistency of statutory interpretation instruct that the meaning of ‘wages’ should be in general the same for income-tax withholding and for FICA calculations.”
Finally, the Court stated that it would not address the validity of the IRS’s currently applicable revenue rulings that exempt from both income-tax withholding and FICA taxation severance payments that are tied to the receipt of state unemployment benefits. As discussed in our report on the oral argument in this case, the government was questioned repeatedly about these rulings because they are hard to square with the broad reading of the FICA “wages” definition advanced by the government here and now adopted by the Court. Those rulings are more generous to taxpayers than would appear to be required under the broad FICA definition. It remains to be seen whether the IRS will revoke those rulings and try to collect FICA taxes on such payments and, if they do, whether that will have an effect on the payment of state unemployment benefits. With the Court having refrained from invalidating, or even directly criticizing, those rulings, it is possible that the IRS will let sleeping dogs lie and continue to abide by the rulings.
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.
January 2, 2014
The government’s reply brief has now been filed in Quality Stores, completing the briefing. The Court will hear oral argument on January 14.
Also linked below are three amicus briefs that have been filed in support of the taxpayer. The brief filed by the ERISA Industry Committee comprehensively addresses the question presented, examining the relevant statutes, legislative history, administrative pronouncements, and judicial precedents. The brief filed by the American Payroll Association engages in a statutory analysis and examines the administrative pronouncements, concluding that the government’s position “would replace the straightforward definition provided by Congress with a cumbersome and essentially unadministrable definition.” The brief filed by the American Benefits Council focuses almost exclusively on the IRS’s Revenue Rulings. Admittedly “derived from an article” previously published by the brief’s author, the amicus brief argues that the regime established by the Revenue Rulings is “incoherent and unsupported” and should be rejected by the Court in favor of the taxpayer’s position, which is “coherent, sensible, and easily understood.”
December 16, 2013
The taxpayer has filed its responsive brief in Quality Stores, setting forth both its basic position that SUB payments are not FICA “wages” and responding in detail to the government’s contrary arguments. The taxpayer’s affirmative case begins with the income tax withholding provisions that the government has argued are irrelevant. The taxpayer argues that the payments are not “remuneration . . . for services” within the meaning of Code section 3401(a) and, in particular, cannot be “wages” because they fall within the category of payments that section 3402(o) describes in its title as “certain payments other than wages” and in the text provides that they “shall be treated as if [they] were a payment of wages.” That statutory argument is supplemented by examination of the legislative history of the passage of section 3402(o) and by a detailed parsing of other statutory provisions suggesting that Congress did not regard these payments as “wages.” The taxpayer also points to statements made by the Court about SUB benefits in another context in Coffy v. Republic Steel Corp., 447 U.S. 191 (1980), to the effect that such payments are not “compensation for work performed” because “they are contingent on the employees being thrown out of work.”
The brief also responds to the arguments made by the government. It dismisses the broad definition of FICA wages in Social Security Bd. v. Nierotko, 327 U.S. 358 (1946) — made in the context of back pay to a current employee — as not probative here where the recipient is not in a current employment relationship with the employer. The taxpayer also takes issue with the government’s reliance on the historical treatment of “dismissal payments,” arguing that these payments are not synonymous with SUB payments.
The taxpayer invokes the Court’s Rowan decision in support of its basic position that “wages” must be construed the same for both FICA purposes and income tax withholding purposes. As noted in our previous report, the government has chosen to oppose this argument without relying on the so-called “decoupling amendment” that Congress enacted in the wake of Rowan. The taxpayer disputes the government’s argument that the consistency rationale of Rowan is best served by treating SUB payments as “wages” for both purposes. To the contrary, the taxpayer argues, there is a sound policy reason for treating such payments as “wages” for income tax withholding (preventing a heavy year-end tax burden), but no corresponding policy reason to do so in the FICA context.
The taxpayer’s brief devotes considerable attention to arguing that no deference should be paid to the IRS’s Revenue Rulings defining what kind of severance payments constitute “wages.” This topic is also the focus of an amicus brief filed by Professor Kristin Hickman, which asks the Court to hold that such rulings are not entitled to Chevron deference because they are not promulgated in compliance with the Administrative Procedure Act. This focus is a bit surprising since the government’s brief does not argue for deference to its Revenue Rulings, and government officials have previously publicly stated that the Justice Department will no longer argue in court that Revenue Rulings are entitled to Chevron deference. The government’s brief, however, does discuss its relevant Revenue Rulings in some detail, in the nature of background for why it believes Congress addressed income tax withholding in the way that it did. The taxpayer treats this discussion as reflecting an “implicit (and incorrect) presumption” that the Court must defer to the Revenue Rulings and, taking no chances, the taxpayer tackles that presumption head-on.
Oral argument is scheduled for January 14.
November 20, 2013
The government has filed its opening brief in the Quality Stores case, which involves the question whether severance payments made pursuant to an involuntary reduction in force are subject to FICA taxation. See our prior coverage here. The brief is considerably shorter than the page limit, as the government has sought to take a relatively simple approach to an issue that in the past has generated complex and detailed briefs and opinions.
The government’s primary submission is that the Court needs to focus its attention on the FICA statute and not be distracted by the income tax withholding statute that formed the basis for the Sixth Circuit’s opinion. The FICA statute broadly defines “wages” for FICA purposes as “remuneration for employment,” and that language assertedly encompasses the severance payments at issue here. To support the argument that this language should be read broadly, the government points to current Treasury regulations and to the Supreme Court’s decision in Social Security Board v. Nierotko, 327 U.S. 358 (1946). The government also relies on the history of the FICA definition of wages, pointing out that it originally contained an exception for discretionary “dismissal payments” like those at issue here, but that exception was repealed in 1950.
The brief then moves on to respond directly to the Sixth Circuit’s reliance on 26 U.S.C. 3402(o), the income tax withholding provision stating that severance payments should be “treated as . . . wages” (and therefore, according to the taxpayer, must be something different from “wages.”) The government states that, by its terms, this provision applies only to income tax withholding and can provide no inference for determining whether the severance payments are subject to FICA taxation. Even if that basic point does not prevail, however, the government argues that the inference drawn by the Sixth Circuit is incorrect. Adopting the analysis of the Federal Circuit in CSX, the government argues that the term “wages” and the class of payments included in section 3402(o) are not mutually exclusive; the latter section is broadly drafted and can encompass payments that also fall within the category of “wages.” The brief then embarks on a fairly detailed account of the history of the IRS’s administrative rulings on the scope of “wages,” seeking to explain why Congress was motivated to enact section 3402(o) as it did and, correspondingly, why that action should not carry any logical inference for the definition of FICA wages. In particular, the government argues that Congress was concerned that the IRS had determined that certain payments were includible in gross income, but not subject to income tax withholding, thus leaving taxpayers with an unexpectedly high tax bill when it came time to file their return. In acting to solve that problem, the government maintains, Congress was not saying anything about FICA nor was it defining “wages” even for income tax withholding purposes.
For those that have followed this issue over the years, we note one subissue that has receded in importance under the government’s current approach — namely, the relevance of legislation enacted by Congress in the wake of the Court’s decision in Rowan Cos. v. United States, 452 U.S. 247 (1981). Taxpayers have pointed to Rowan as indicating that terms in the FICA statute and income tax withholding statute generally ought to be interpreted harmoniously. In the Sixth Circuit and in other litigation, the government has defended against the citation of Rowan by pointing to later legislation in which Congress codified the specific result in Rowan but also enacted a “decoupling amendment” establishing that nothing in the income tax withholding regulations providing an exclusion from “wages” “shall be construed to require a similar exclusion from ‘wages'” in the FICA regulations. 31 U.S.C. § 3121(a). The legislative history described this provision as broadly decoupling the FICA definition of wages from the income tax withholding definition. See our reports on the Sixth Circuit briefing here and here. The Sixth Circuit, however, was unpersuaded by the “decoupling amendment” argument because applying decoupling to statutory definitions of “wages” is based entirely on the legislative history; the decoupling amendment itself expressly addresses only regulations. The Federal Circuit in CSX similarly rejected the government’s position on the decoupling amendment, even though it agreed with the government on the ultimate issue of including severance pay in FICA wages.
The government apparently has concluded that the “decoupling” argument will fare no better in the Supreme Court. Instead, it makes other arguments to defend against the taxpayer’s reliance on Rowan. First, it argues simply that Rowan is irrelevant because it was addressing a different issue — the validity of a Treasury regulation providing that the value of meals and lodging should be included in FICA wages. More substantively, the government argues that its position is consistent with the rationale of Rowan. The Court stated there that Congress intended to coordinate the FICA and income tax withholding systems to advance Congress’s interest in “simplicity and ease of administration” (452 U.S. at 257). According to the government, that interest is disserved by the Sixth Circuit’s decision because Congress has provided that the supplemental benefits included in the section 3402(o) definition are to be treated as wages for income tax withholding purposes.
The taxpayer’s response brief is due in mid-December, and oral argument is scheduled for January 14.
November 5, 2013
The Supreme Court has scheduled oral argument in the Quality Stores case for the afternoon of Tuesday, January 14. Two other cases will be argued in the morning session, and the Court will then break for lunch and reconvene at 1:00 for the Quality Stores argument, in which each side is given 30 minutes for argument. A decision is expected no later than the end of June.
October 1, 2013
The Supreme Court, not surprisingly, granted cert this morning in the Quality Stores case. As we have previously reported (see our prior coverage here), the Court is now poised to resolve a conflict between the Sixth Circuit and the Federal Circuit regarding whether severance payments paid to employees pursuant to an involuntary reduction in force are “wages” subject to FICA taxation. Notably, Justice Kagan did not participate in the order granting the petition, perhaps because she had some involvement in the case during her tenure as Solicitor General. Her recusal creates the theoretical possibility that the Court could ultimately divide 4-4 on the case and thus be unable to resolve the conflict.
The government’s opening brief is due November 15. Oral argument will likely be scheduled for January 2014.
September 3, 2013
Linked below is the government’s reply brief in support of its petition for certiorari. The reply attempts to counter the taxpayer’s argument that the conflict between the Sixth Circuit and the Federal Circuit is unimportant because all taxpayers will choose to avoid the Federal Circuit in the future. See our previous report here. The government criticizes this argument for seeking to preserve a “forum shopping” opportunity and also remarks that “there is no reason to assume that other courts of appeals” faced with this issue will follow the Sixth Circuit’s reasoning rather than that of the Federal Circuit. The government also dismisses the taxpayer’s suggestion that the issue can be resolved by promulgating new regulations, thus obviating the need for Supreme Court review. The government asserts that the Sixth Circuit’s opinion suggests that the IRS has no authority to treat the severance payments as subject to FICA taxation and therefore the Sixth Circuit likely would not be swayed by new regulations.
As previously noted, the Court is scheduled to consider this petition at its September 30 conference and could announce whether it will grant certiorari as early as that afternoon.
August 15, 2013
The taxpayer has filed its brief in opposition in the Supreme Court in Quality Stores. (See our earlier report on the certiorari petition here.) The government has the option of filing a reply brief, which has no specific due date, but likely would be filed no later than early September.
The brief in opposition argues at length that the Sixth Circuit’s decision is correct on the merits. With respect to the government’s reliance on a circuit conflict, the taxpayer describes this as a “shallow conflict” that does not justify a grant of certiorari. Specifically, the taxpayer acknowledges a conflict with the Federal Circuit’s decision in CSX, but argues that the other decisions from regional circuits cited by the government do not conflict “because they all involved payments made to employees who had accepted some form of voluntary separation from employment or payments otherwise materially different in character from SUB payments.” The taxpayer argues that the conflict with the Federal Circuit “may have no practical effect” because taxpayers can always choose to seek a refund in district court and thus avoid the CSX precedent. The taxpayer also suggests that “it is possible” that the Federal Circuit could reconsider its position in light of information about the IRS’s prior administrative practice that was presented to the Sixth Circuit but not to the CSX court.
The Court has scheduled the certiorari petition for consideration at its September 30 conference. Although the Court does not formally begin its new Term until the following Monday (the traditional “First Monday in October”), it has adopted the practice in recent years of announcing grants of certiorari in advance of that date, in order to give the lawyers an opportunity to start on the briefing. Thus, if cert is granted in Quality Stores, an order could issue as early as the afternoon of September 30.
July 3, 2013
The taxpayer has obtained an extension until July 31 to respond to the government’s petition for certiorari in Quality Stores.
June 2, 2013
The government has finally filed its long-awaited cert petition in Quality Stores, asking the Supreme Court to review the Sixth Circuit’s ruling that severance payments paid to employees pursuant to an involuntary reduction in force are not “wages” for FICA tax purposes. In our previous coverage, we have noted why this case is a strong candidate for Supreme Court review, and the cert petition sets those forth succinctly: (1) “the Sixth Circuit’s decision in this case squarely conflicts with the Federal Circuit’s decision in CSX Corp.”; and (2) “the question presented here is both recurring and important.” The petition elaborates on that latter point by stating that the question presented “is currently pending in eleven cases and more than 2400 administrative refund claims, with a total amount at stake of more than $1 billion. That figure is expected to grow.”
The petition goes on to address the merits of the underlying issue in some detail, even though there will be another opportunity to brief the merits if certiorari is granted. In essence, the government argues that the court of appeals went astray by drawing an inference about FICA taxation from Code section 3402(o)(2), which addresses income tax withholding. The government asserts that the “court of appeals’ chain of reasoning reflects significant misunderstandings of Section 3402(o)’s text, history, and purpose.” To the government, that section “simply directs that payments encompassed by the statutory definition will be subject to income-tax withholding whether or not they would otherwise be ‘wages.’” Therefore, it “has no logical bearing on the determination whether particular payments to terminated employees are subject to FICA taxation.”
Instead, according to the government, the FICA taxation issue should be resolved simply by asking whether the severance payments were “wages.” Looking to Social Security Board v. Nierotko, 327 U.S. 358 (1946), and other authorities, the government concludes that they are “wages” and therefore should be subject to FICA taxation.
The taxpayer’s response is currently due in early July. Because of the Court’s summer recess, however, a decision on whether to grant certiorari will not be announced before late September.
May 3, 2013
The Chief Justice has granted the government a second extension of time to file its petition for certiorari in Quality Stores. See our previous coverage here. The petition is now due May 31. By statute, the time to petition for certiorari can be extended for a maximum of 60 days, so the government is now about at the end of its rope, and it will surely fish or cut bait by the current May 31 deadline.
April 3, 2013
The Supreme Court has granted the government’s request for a one-month extension to file its petition for certiorari in Quality Stores, extending the due date from April 4 to May 3. As we have previously observed, we believe there is a strong likelihood that the government will petition in this case and that the Court will grant certiorari to resolve the circuit conflict on the treatment for FICA purposes of supplemental unemployment compensation benefits. See our previous coverage here.
With this extension, however, the Court likely will not decide whether to grant certiorari until early October, after the summer recess. If Quality Stores were to file its response to the cert petition early, however, without taking its full 30 days to respond, then the petition could still be ready for a ruling by the Court before the summer recess. In either event, if the Court were to grant certiorari, the case would probably be argued in late 2013, with a decision on the merits expected by June 2014.
January 7, 2013
Acting promptly after receiving the taxpayer’s response, the Sixth Circuit has denied the government’s petition for rehearing en banc in Quality Stores. Even though the government’s petition pointed to a direct circuit conflict and alleged tension with the Sixth Circuit’s own precedent (see our report here), the court’s order recites that no judge on the Sixth Circuit requested a vote on the petition.
The court’s order puts the ball back in the government’s court to decide whether to seek Supreme Court review. Given the conflict and the apparent importance of having a uniform nationwide rule, there is a significant possibility that the government will ask the Supreme Court to step in.
A petition for certiorari would be due on April 4.
December 20, 2012
Following up on the Sixth Circuit’s order, the taxpayer has now filed a response to the government’s petition for rehearing en banc in Quality Stores. See our prior reports here. The brief offers a point-by-point response to the government’s petition, arguing in particular that the Sixth Circuit was correct in relying on Coffy v. Republic Steel Corp., 447 U.S. 191 (1980), and disputing the government’s contention that the panel’s decision was inconsistent with earlier Sixth Circuit decisions.
The petition is now back in the lap of the Sixth Circuit, which could rule in the next few weeks on whether it will rehear the case.
December 5, 2012
The Sixth Circuit yesterday directed the taxpayer to file a response to the government’s petition for rehearing en banc in Quality Stores. As we previously noted, the Federal Rules of Appellate Procedure prohibit responding to rehearing petitions unless ordered by the court, but such an order in this case was a strong possibility. Courts of appeals frequently direct responses to rehearing petitions filed by the government, and the government’s petition highlights why this case is a strong candidate for the relatively rare action of rehearing en banc. If the court’s order is surprising at all, it is that it took so long to issue it.
The order signifies that the Sixth Circuit is giving more than usual attention to this rehearing petition, but it does not necessarily mean that the petition will be granted.
The taxpayer’s response is due December 18.
October 19, 2012
The government yesterday filed a petition for rehearing en banc in the Sixth Circuit in the Quality Stores case, asking the full court to reverse the panel and eliminate the circuit conflict on the treatment for FICA purposes of supplemental unemployment compensation benefits. As noted in our previous post, regardless of whether the petition is granted, the mere filing of the petition has the effect of postponing the deadline for seeking Supreme Court review. The 90-day period for filing a petition for certiorari begins to run anew from the date of the resolution of the rehearing petition. Thus, if this case ultimately goes to the Supreme Court, there is no longer any realistic possibility that it would be heard this Term — that is, a decision could not be expected by June 2013.
The rehearing petition emphasizes that the issue is important, stating that $120 million is at stake in pending refund suits alone, and that a total of over $1 billion is at issue when all claims are taken into account. It also recites that the IRS has suspended action on administrative refund claims totalling over $127 million from approximately 800 taxpayers located in the Sixth Circuit.
The petition 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 Co., 447 U.S. 191 (1980),] establishes that SUB pay is not wages for FICA purposes.” Coffy was not a tax case, but instead was a case interpreting the Veterans’ Reemployment Rights Act, holding that SUB benefits are a “perquisite of seniority” for which returning veterans must be given service time credit for the time they spent in the military. (That may sound deadly dull, but I note parenthetically that Coffy was also my first Supreme Court argument.) On this point, the petition argues that the panel’s decision is in tension with two prior Sixth Circuit decisions holding that wages for FICA purposes is 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.” That issue was a focus of the original briefing in the case, but the rehearing petition asserts that the panel failed to address it in its decision.
There is no current due date for the taxpayer’s response. Rule 40(a)(3) of the Federal Rules of Appellate Procedure provides that parties are not to respond to petitions for rehearing unless ordered by the court. Given the importance and complexity of this case, there is a strong probability that the court will order a response.
September 10, 2012
More than two years after the appellate briefing was completed, the Sixth Circuit has finally issued its decision in Quality Stores. (See our previous coverage here.) The court ruled that severance payments paid to employees pursuant to an involuntary reduction in force are not “wages” for FICA tax purposes. In so holding, the Sixth Circuit expressly declined to follow the Federal Circuit’s contrary decision in CSX Corp. v. United States, 518 F.3d 1328 (2008).
The court agreed with the taxpayer’s argument that the severance payments are not literally “wages” under the Code. Although Code section 3402(o) provides that “supplemental unemployment compensation benefits” (which the court found to include these severance payments) should be “treated . . . as wages” for income tax withholding purposes, there is no analogous directive for FICA. At the same time, relying on Rowan Cos. v. United States, 452 U.S. 247 (1981), the court ruled that the definition of “wages” is the same for income tax withholding and FICA purposes. (As discussed in prior posts, the government argues that intervening legislation has made Rowan no longer good law for that proposition.) Therefore, the court concluded, the Code does not make the severance tax payments subject to FICA taxation.
The government is likely to seek further review in this case. Given the clear circuit conflict, and the importance to the case of the continuing vitality of the Supreme Court’s decision in Rowan, this issue is certainly a candidate for Supreme Court review down the road.
A petition for rehearing is due on October 22. A petition for certiorari is currently due on December 6. That date would be pushed off if the government seeks rehearing.
August 4, 2011
At long last, the Sixth Circuit has scheduled oral argument in the Quality Stores case for October 6, 2011. This will be more than a year since the briefing in the case was completed. The identity of the three-judge panel is expected to be announced on September 19.
October 4, 2010
As we previously reported, a district court in Michigan disagreed with the Federal Circuit’s decision in CSX Corp. v. United States, 518 F.3d 1328 (2008) (opinion linked here), and held that severance payments paid to employees pursuant to an involuntary reduction in force are not “wages” for FICA tax purposes. The employer, Quality Stores, has now filed its answering brief in the Sixth Circuit defending the district court opinion and addressing the arguments made by the government in its opening brief, and the government has filed its reply brief. (The briefs are attached below.)
The employer’s main argument is a textual one, based on the interplay between the FICA and income tax withholding provisions of the Code. Asserting that “wages” should mean the same thing in both sets of provisions, the employer relies on Code section 3402(o), which states that “supplemental unemployment compensation benefits” should be “treated as . . . wages.” Implicit in this provision, the employer asserts, is the proposition that such “SUB pay” would not otherwise be wages. Since the severance payments are encompassed within “SUB pay,” it follows that they are not “wages” for FICA purposes. (FICA does not contain a provision analogous to section 3402(o)).
The Federal Circuit in CSX had rejected the logic of this argument, reasoning that section 3402(o) might imply that some SUB pay is not “wages,” but not that all SUB pay is not “wages.” In addition to that relatively narrow argument, the government has suggested more broadly that the meaning of “wages” in the income tax withholding context “has no bearing” on its meaning in the FICA context. The Federal Circuit did not fully embrace that suggestion in CSX, stating that “we disagree with the government’s argument that after 1983, the term ‘wages’ in FICA must be interpreted without reference to the same term in the income tax withholding statutes.” In its reply brief in Quality Stores, the government focuses primarily on a narrower argument that accords with the Federal Circuit’s approach, contending that section 3402(o) was addressed only to the subset of SUB pay that had been exempted from withholding by certain Revenue Rulings. Because the payments in this case would not fall within those Rulings, the government reasons, section 3402(o) is irrelevant.
The employer also argues that the Sixth Circuit is bound by the Supreme Court’s decision in Rowan Cos. v. United States, 452 U.S. 247 (1981), to treat SUB pay the same for income tax withholding and FICA purposes. The government responds that Rowan cannot have that precedential effect after Congress overruled it and passed the “decoupling provision.”
With the briefing now concluded, the parties await the assignment of a date for oral argument, which will likely occur in the winter. The briefs are complex, and it remains to be seen whether the Sixth Circuit will immerse itself deeply in the issue or, instead, give considerable deference to the decision of its sister circuit in CSX.
July 22, 2010
On July 13, 2010, the government filed its opening brief in the Sixth Circuit in In re Quality Stores, Inc: United States v. Quality Stores, Inc., No. 10-1563. In that case, the government is appealing the district court’s surprising decision holding that severance payments made to employees pursuant to an involuntary reduction in force are not “wages” for FICA tax purposes if they qualify for exclusion from income tax withholding as “supplemental unemployment compensation benefits” (“SUB pay”) under Code section 3402(o)(2). As the district court acknowledged, its decision directly conflicts with the Federal Circuit’s ruling in CSX Corporation v. United States, 518 F.3d 1328 (2008), which had appeared to resolve this issue definitively in favor of the IRS. (This Miller and Chevalier Tax and Employee Benefits Alert contains a fuller discussion of the district court’s opinion and the steps that companies can take to protect their rights pending the outcome of the appeal.)
Although the government’s opening brief relies extensively on CSX, it also addresses the issues comprehensively as if the Sixth Circuit were the first circuit court to consider the issue. Primarily, the government argues that the case is controlled by Code section 3121, which broadly defines wages as “all remuneration for employment” — a definition that encompasses severance pay. The government criticizes the district court’s reliance on Code section 3402(o) both because that section relates to income tax withholding, rather than FICA taxes, and because its terms in any event do not dictate that SUB pay is not “wages.” With respect to the district court’s reliance on Rowan Cos. v. United States, 452 U.S. 247 (1981), the government argues that Rowan does not support exempting SUB pay from FICA taxation and, in any event, Congress’s enactment of the “decoupling provision” in the wake of Rowan eliminates any possible support that the case could lend to the companies’ position.
The answering brief for Quality Stores is currently due September 8, 2010. Links to the government’s brief and the district court opinion are attached.