Sixth Circuit Creates Circuit Conflict on FICA Exclusion for Severance Payments

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.

Quality Stores – Sixth Circuit opinion