Petition for Certiorari Filed in Quality Stores

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.

Quality Stores – Petition.for Certiorari

Time to Seek Certiorari in Quality Stores Further Extended Until May 31

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.

Cert Petition in Quality Stores Now Due on May 3

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.

Rehearing Denied in Quality Stores

January 7, 2013 by  
Filed under Employee Benefits, Quality Stores

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.

 

Taxpayer Responds to Petition for Rehearing in Quality Stores

December 20, 2012 by  
Filed under Employee Benefits, Quality Stores

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.

Quality Stores – Taxpayer Response to Petition for Rehearing

 

 

Sixth Circuit Orders Response to Government’s En Banc Petition in Quality Stores

December 5, 2012 by  
Filed under Employee Benefits, Quality Stores

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.

 

Government Seeks Rehearing En Banc in Quality Stores

October 19, 2012 by  
Filed under Employee Benefits, Quality Stores

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.

Quality Stores – Petition for Rehearing

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

Oral Argument Scheduled in Quality Stores

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.

Briefing Completed in Quality Stores

October 4, 2010 by  
Filed under Employee Benefits, Quality Stores

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.

Quality Stores – Taxpayer’s Answering Brief

Quality Stores – US Reply Brief

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