United States v. Quality Stores, Inc.
134 S. Ct. 1395
| SCOTUS | 2014Background
- Quality Stores filed for involuntary Chapter 11 bankruptcy in 2001 and paid severance to thousands of terminated employees.
- Two termination plans varied severance by job grade, seniority, and service; neither tied severance to state unemployment benefits.
- Quality Stores treated severance as wages on W-2s, paid the employer share of FICA, and withheld employee FICA taxes.
- Quality Stores sought refunds of about $1.0 million in FICA taxes for itself and 1,850 former employees after IRS inaction.
- Bankruptcy Court granted summary judgment for Quality Stores; Sixth Circuit and District Court affirmed that severance payments were not wages under FICA.
- The Supreme Court reversed, holding severance payments are taxable wages under FICA, and §3402( o ) does not narrow FICA’s wages definition.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether severance payments fall within FICA’s definition of wages | Quality Stores argues severance payments are not wages under FICA | United States argues severance payments are not wages under FICA | No; severance payments are wages under FICA |
| Whether §3402(o) limits the FICA wages definition for withholding purposes | Quality Stores says §3402(o) excludes severance from wages for withholding | United States says §3402(o) only expands withholding treatment while aligning definitions | §3402(o) is compatible with treating severance as wages for FICA as well as withholding |
| Effect of Rowan on FICA wage interpretation and administrative simplicity | Quality Stores relies on Rowan to limit uniformity | US argues Rowan supports congruence of FICA and withholding definitions | Rowan supports consistency, but does not narrow FICA’s broad wages definition beyond this case |
| Policy justification for uniform treatment of wages across tax regimes | Quality Stores asserts uniform definition would exclude severance | US contends administrative simplicity supports congruent interpretation | Uniform interpretation consistent with broad Wages definitions and congressional intent |
Key Cases Cited
- Social Security Bd. v. Nierotko, 327 U.S. 358 (U.S. 1946) (broad view of wages includes entire employment relationship)
- Rowan Cos. v. United States, 452 U.S. 247 (U.S. 1981) (uniformity of wages definitions across tax regimes; simplicity of administration)
- CSX Corp. v. United States, 518 F.3d 1328 (Fed. Cir. 2008) (interpretation of §3402(o) and SUBs; 'as if' wages concept)
- Mandel Brothers v. FTC, 359 U.S. 385 (U.S. 1959) (headings cannot declare all listed items as not wages; context matters)
- Mayo Foundation for Med. Educ. & Research v. United States, 131 S. Ct. 704 (S. Ct. 2011) (broad definition of wages under tax statute)