United States v. Quality Stores, Inc.

Whether severance payments made to involuntarily terminated employees are taxable as wages under the Federal Insurance Contributions Act.

Respondent made severance payments to involuntarily terminated employees. Respondent paid the Federal Insurance Contributions Act ("FICA") tax and withheld former employees' shares of the FICA tax. Respondent asserted that the payments were supplemental unemployment compensation benefits ("SUB payments") and not taxable wages under FICA. Respondent requested a refund of those FICA taxes paid on behalf of itself and its former employees. The IRS denied the refund, and Respondent brought an action in bankruptcy court.

The bankruptcy court found the severance payments to be SUB payments and that Respondent was entitled to a refund. The district court and Sixth Circuit affirmed. The Sixth Circuit held that the severance payments were SUB payments, and interpreted I.R.C. § 3402(o) to excluded SUB payments from “wages” for federal income tax. Rowan Cos. v. U.S. equated the income tax definition of “wages” to FICA, and the Sixth Circuit concluded that SUB payments are not taxable as wages under FICA. The Supreme Court granted certiorari to decide whether severance payments made to involuntarily terminated employees are taxable as wages under the Federal Insurance Contributions Act.