The IRS has announced that it will disallow claims for refunds of Federal Insurance Contributions Act (FICA) taxes paid with respect to most severance payments and will take no further action on any of the appeal requests from denied FICA tax refund claims that it suspended pending the resolution of the Quality Stores case. The IRS restated the holding of Rev. Rul. 90-72, in which it determined that supplemental unemployment benefits (SUB) payments were wages for FICA tax purposes except for payments falling under a narrow exception: SUB payments to terminated employees must be linked to the receipt of state unemployment benefits and not paid in lump sum. The IRS’s action follows the U.S. Supreme Court’s 2014 decision in Quality Stores, 2014-1 ustc ¶50,228.
Quality Stores involved an employer that made severance payments to several hundred of its employees who had been terminated while the company was in Chapter 11 bankruptcy. The government withheld FICA tax from the payments, and the company sought a refund on its behalf and on behalf of its former employees.
Initially, the Sixth Circuit Court of Appeals held that the severance payments were not wages for FICA tax purposes. This created a Circuit split because the Sixth Circuit’s decision contradicted the Federal Circuit’s 2008 ruling in CSX Corp., 2008-1 ustc ¶50,218 that severance payments were wages for FICA and tax purposes.
Ultimately, the U.S. Supreme Court reversed the Sixth Circuit. It held that FICA defines wages as all remuneration for employment, including the cash value of all remuneration (including benefits) paid in any medium other than cash. The Court found that the term “employment” encompasses any service, of whatever nature, performed . . . by an employee for the person employing him. Severance payments, the Court held, are therefore remuneration. Severance payments are made to employees only. It would be contrary to common usage to describe as a severance payment, remuneration provided to someone who has not worked for the employer, the Court observed.
The IRS reported that before the Supreme Court’s decision in Quality Stores, it had received FICA refund claims (along with claims for refunds of Federal Unemployment Tax Act (FUTA) and Railroad Retirement taxes (RRTA) paid with respect to severance payments). After the IRS disallowed these claims, many taxpayers appealed to IRS Appeals. Action on these appeals was also suspended pending the Supreme Court’s decision in Quality Stores.
As a result of the Supreme Court’s holding in Quality Stores, the IRS stated in Announcement 2015-8 that it will disallow all claims for refund of FICA or RRTA taxes paid with respect to severance payments that do not satisfy the narrow exclusion in Rev. Rul. 90-72. The IRS will also disallow all claims for FUTA tax refunds. This treatment, the IRS explained, applies to all pending refund claims before the IRS. No further action will be taken on these claims, the IRS reported.
Rev. Rul. 90-72
In Rev. Rul. 90-72, the IRS provided one narrow exception under which SUB payments were not wages for FICA tax purposes by laying out specific factual circumstances under which SUB payments would qualify for the exemption. In summary, the exception states that to be excluded from the definition of wages for FICA purposes, SUB payments must be linked to the receipt of state unemployment compensation and must not be paid to the employee in a lump sum. The IRS clarified in Announcement 2015-8 that the exception in Rev. Rul. 90-72 continues to be in effect.