A Bloomberg report said the US Supreme Court recently saved the Internal Revenue Service of over $1 billion in refunds if not for its ruling in favor of the Obama administration. According to the ruling, severance pay will now be taxed. The court reasoned that payments to laid-off workers are subject to Social Security and Medicare taxes under provisions of the Federal Insurance Contributions Act, or FICA.
The ruling, Bloomberg said, was for a lawsuit filed by the country's largest agricultural specialty retailer, Quality Stores Inc, who is claiming a refund on their payment for the severance pay taxes of the 3,100 workers it fired following the closure of its stores beginning 2001 until 2002. Quality Stores, who had since been shuttered, asked a bankruptcy court judge to force the IRS to pay the company back as the supplemental unemployment compensation was an exemption to the FICA's rules.
Justice Anthony Kennedy, who wrote for the Supreme Court, rejected Quality Stores' claims and argued the payments were indeed subject to tax. He wrote in the ruling, "The severance payments here were made to employees terminated against their will, were varied based on job seniority and time served and were not linked to the receipt of state unemployment benefits. Under FICA's broad definition, these severance payments constitute taxable wages."
Quality Stores' lawyer Bob Hertzberg said about the court ruling, "The decision is a huge blow for employers and employees alike. In addition to the impact on Quality Stores and its former employees, this ruling has far-reaching implications for the thousands of other organizations and workers fighting for refunds."
A brief filed by the Obama administration detailed that refund claims had been made in 2,400 administrative cases and 11 unresolved lawsuits. The figure at stake is reportedly at over a billion dollars and is expected to grow.
