The decision in United States v. Quality Stores, Inc., No. 10-1563, 2012 WL 3871364, (6th Cir. Sept. 7, 2012) ("Quality Stores"), could provide significant Federal Insurance Contributions Act (FICA) refund opportunities for employers that have made severance payments to employees and have a principal place of business in certain states, KPMG officials said on a recent webcast.
In a KPMG webcast on a recent federal court of appeals ruling concerning taxability of certain severance payments in four states under the Federal Insurance Contribution Act (FICA), KPMG tax professionals pointed out that the decision could have national implications and advised companies throughout the country to examine potential tax-technical and business ramifications.
“Although this decision is currently most pertinent to companies with their ‘principal place of business’ in the Sixth Circuit states of Michigan, Kentucky, Ohio and Tennessee, future Internal Revenue Service or court activity could expand the geographic reach, and therefore employers based outside the Sixth Circuit should also take notice,” said Scott Schapiro, a tax principal in KPMG’s International Executive Services practice, one of the participants in the webcast sponsored by the U.S. audit, tax and advisory firm.
The U.S. Court of Appeals for the Sixth Circuit ruled on Sept. 7 in United States vs. Quality Stores, Inc., that severance-related payments made to former employees of companies in the four-state area, as a result of involuntary separations due to reductions in force or job eliminations, should not be considered taxable compensation for FICA purposes and, consequently, should not be subject to FICA taxes.
The ruling is in conflict with a 2008 Federal Circuit court decision in CSX vs. United Stateswhich found that such payments, except under specific circumstances, are taxable under FICA.
“While these conflicting decisions leave employers with a less than certain national response, the Quality Stores ruling could open an opportunity for employers with their‘principal place of business’ in the Sixth Circuit for potential refund and/or prospective savings opportunities,” Schapiro said.
Schapiro and other KPMG professionals on the webcast explained that, ultimately, the ability of employers to rely on the Quality Stores decision, prospectively and for refund purposes, will be based on several factors that take into account geography, specific terms of severance payments made and, in the case of refunds, future IRS or court action on the issue.
They also pointed out that if a company has made past severance payments or anticipates future severance payments as a result of closures, reductions in force, and other similar actions, the FICA tax treatment of such severance payments may also be worth analyzing.
The U.S. government has until Oct. 22, 2012 to request a rehearing in the Sixth Circuit case. Assuming a petition for rehearing is not filed and/or allowed, the government has until Dec. 6, 2012 to file a certiorari petition with the U.S. Supreme Court.
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