By Edwin S. Hopson
On March 25, 2014, the U.S. Supreme Court ruled in United States v. Quality Stores, Inc., 572 U.S. ___ (2014), No. 12-1408, that severance payments made to employees involuntarily terminated in connection with Quality Stores’ Chapter 11 bankruptcy were taxable wages for purposes of the Federal Insurance Contributions Act (FICA). A bankruptcy court, a district court and a court of appeals had held to the contrary. Thus, in an opinion by Justice Kennedy, joined in by all other Justices but Kagan who recused herself, the Court reversed the court of appeals, finding that FICA’s definition of “wages” was stated broadly as “all remuneration for employment.” The Court noted that the severance payments at issue “were varied based on job seniority and time served, and were not linked to” state unemployment benefits. They were a part of the employer-employee relationship for which compensation was paid. The Court also stated that the lengthy list of exemptions from the definition of wages included severance payments “because of … retirement for disability.” There was no explicit exemption for the severance payments at issue here.
FICA’s statutory history also supported the Court’s holding in this case.
Finally, the Court stated that the major principle of Rowan Cos. v. United States, 452 U. S. 247 (1981), 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, also supported its decision.
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