The U.S. Supreme Court has agreed to hear a case that, once a decision is rendered, should determine whether severance payments are subject to Social Security and Medicare payroll taxes, known as FICA taxes.
In 1990, the IRS issued Revenue Ruling 90-72 describing the circumstances under which severance payments are subject to FICA taxes. In 2008, that ruling was validated by the U.S. Court of Appeals for the Federal Circuit (CSX Corp. v. United States, 518 F.3d 1328, Fed. Cir. 2008).
Then in 2010, a U.S. District Court in Michigan declined to follow Revenue Ruling 90-72 (Quality Stores Inc., et al., v. United States, 424 B.R. 237, W.D. Mich 2010). The IRS appealed, and the 6th U.S. Circuit Court of Appeals sided with the District Court in 2012 (In re Quality Stores, Inc., CA-6, 2012-2 USTC Paragraph 50,551, cert granted Oct. 1, 2013).
To resolve the conflicting decisions between the two circuit courts, the U.S. Supreme Court has agreed to hear the appeal of the Quality Stores case. In the wake of the 6th Circuit Court’s decision last year, many companies who had previously paid FICA taxes on severance payments filed for refund claims. Those who have not filed claims should consider doing so before the statute of limitations expires.
It will probably be several more months before the Supreme Court renders its decision.