Daily Tax Update - September 12, 2012: Sixth Circuit Rules in Quality Stores that Severance Pay is Not Subject to Fica Tax

SIXTH CIRCUIT RULES IN QUALITY STORES THAT SEVERANCE PAY IS NOT SUBJECT TO FICA TAX:  On September 7, 2012, in United States v. Quality Stores, et al.  (12a0313p.06), the 6th Circuit Court of Appeals affirmed the Michigan District Court decision that FICA taxes were not required to be paid on certain severance payments made to involuntarily terminated employees.  This decision sets up a conflict between the 6th Circuit and the Federal Circuit Court’s decision in CSX Corp. v. United States, 518 F. 2d 1328 (Fed. Cir. 2008).  The Federal Circuit had agreed with the IRS position that such severance payments had to meet the requirements of Revenue Ruling 90-72 to be excluded from FICA.  That ruling  required,  among other things, that the payments be made pursuant to a plan to supplement the receipt of state unemployment compensation;  the IRS also took the position that payments in a lump sum were not considered linked to such state programs.  The 6th Circuit refused to follow the analysis in Rev. Rul. 90-72 and instead based its decision on statutory interpretation. 

  • Given the uncertainty created by these cases, a number of employers that had offered involuntary severance programs during the economic downturn have filed protective refund claims for FICA taxes previously paid.  Although the IRS generally has been denying or failing to act on such claims, employers that have not already filed such claims (particularly those in the 6th Circuit) may wish to weigh the merits and costs of filing protective refund claims for any open years that would allow them to retain the right to seek recovery of potential FICA tax overpayments for those years.  
  • For additional information, contact Anne Moran (202-429-6449), amoran@steptoe.com

MISCELLANEOUS GUIDANCE RELEASED:

T.D. 9599 contains final regulations that apply to determine when property is traded on an established market (that is, publicly traded) for purposes of determining the issue price of a debt instrument.

INTERNAL REVENUE SERVICE - CIRCULAR 230 DISCLOSURE: 
As provided for in Treasury regulations, advice (if any) relating to federal taxes that is contained in this communication (including attachments) is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any plan or arrangement addressed herein.

STEPTOE & JOHNSON LLP - TAX PRACTICE 
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