Earlier today, the Supreme Court agreed to review the Sixth Circuit’s decision United States v. Quality Stores. In that decision, the Sixth Circuit sided with taxpayers and concluded that certain severance payments that qualify as supplemental unemployment benefit payments (or “SUB” payments) for federal income tax purposes are not subject to tax under the Federal Insurance Contribution Act (FICA).
The Supreme Court is expected to resolve a split between the Sixth Circuit and the Federal Circuit. The Federal Circuit had previously agreed with the government in an earlier case, CSX Corp. v. United States, that the term “wages” has different definitions for FICA and income tax purposes and that all severance payments are wages subject to FICA taxes if they (1) are paid in lump sum or (2) are not conditioned on the receipt of state unemployment benefits.
The Government has stated that the amount at stake regarding this issue exceeds $1 billion and is expected to grow. We believe that, in fact, much more is at stake than that.