Tuesday, March 25, 2014
Today the US Supreme Court decided Quality Stores by an 8-0 vote in favor of the IRS. The IRS argued that when Quality Stores gave severance pay to its workers, the company and workers had to pay FICA (social security/medicare) tax on that pay. The Supreme Court agreed, and rightly so. Severance pay is just as much pay as regular wages, so this makes sense in terms of economics, and the Supreme Court agreed with the basic principle that all forms of labor compensation that required income tax withholding should required FICA in Rowan Cos. v. United States, 452 U. S. 247 (1981).
So how could Quality Stores have won in the lower courts? ---Because the IRS issued regulations in 1990 that contradict Rowan.The IRS said that “supplemental unemployment insurance benefits” (SUBs) that companies add on to state unemployment insurance benefits don’t have to pay FICA. Thus, Quality Stores argued that they should get exemption from FICA too.
Note that neither party had incentive here to make the legally correct argument: that Quality Stores should pay FICA, but so should all the other company’s SUB’s. The Supreme Court arrived at that conclusion anyway. At least, the Court brushed away the IRS’s 1990 rule as irrelevant since Rowan clearly implied Quality Stores should pay FICA. The opinion evades the most important implication of the opinion's reasoning, which is that the 1990 IRS regulations exempting SUB’s from FICA are unlawful. The key paragraph is:
In concluding, the Court notes that the IRS still provides that severance payments tied to the receipt of state unemployment benefits are exempt not only from incometax withholding but also from FICA taxation. See, e.g.,Rev. Rul. 90–72, 1990–2 Cum. Bull. 211. Those Revenue Rulings are not at issue here. Because the severance payments here were not linked to state unemployment benefits, the Court does not reach the question whether the IRS’ current exemption is consistent with the broad definition of wages under FICA.
I'm glad the Court noticed the point, even though it didn't give us dictum on it. I suppose nobody has standing to challenge the FICA exemption of SUB's anyway, since the illegal exemption helps companies and workers and only hurts taxpayers.