Taxpayer Brief Filed in Quality Stores

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.

Quality Stores – Taxpayer’s Response Brief

Quality Stores – Amicus Brief of Prof. Hickman