On March 24, 2014, the U.S. Supreme Court issued its decision in United States v. Quality Stores, Inc., No. 12-1408, holding that severance payments made to employees terminated in connection with a company's Chapter 11 bankruptcy plan are taxable wages under the Federal Insurance Contributions Act (FICA).
Before and after the filing of an involuntary Chapter 11 bankruptcy petition, Quality Stores, Inc. terminated thousands of employees. The terminated employees received severance payments based on title, length of service, and willingness to continue working for a specified period during the company's post-bankruptcy operations. Quality Stores reported the severance payments as wages, paying the employer's share of FICA taxes and withholding the employees' share of FICA taxes. Later, Quality Stores filed for a refund of FICA taxes; the Internal Revenue Service neither allowed nor denied the claim. Quality Stores then initiated a proceeding in the bankruptcy court to obtain a refund, and the bankruptcy court granted summary judgment in the company's favor, held that the payments did not constitute taxable wages, and ordered the refund. The District Court and the Sixth Circuit affirmed.
The U.S. Supreme Court reversed, finding that the severance payments were taxable wages under FICA. The Court noted that FICA defines "wages" broadly, and its list of specific exemptions reinforces the breadth of the general definition. The Court also observed that FICA exempts from taxable wages severance payments for disability, an exemption that would be unnecessary unless other types of severance payments are in fact "wages." The Court rejected Quality Stores' arguments based on the Internal Revenue Code's chapter governing income tax withholding, looking to the regulatory background of that section and the general premise that the meaning of "wages" should typically be the same for income-tax withholding and FICA purposes.
Justice Kennedy delivered the decision for a unanimous Court. Justice Kagan took no part in the consideration or decision of the case.