In the case of United States v. Quality Stores, Case No. 10-1563 (6th Cir. Sept. 7, 2012), the Court of Appeals for the Sixth Circuit held that severance pay is not subject to FICA taxes, creating a split among the circuits on this issue. The United States requested a rehearing en banc, which has been denied. The United States will likely file a petition for certiorari to the Supreme Court. If the Supreme Court upholds the Sixth Circuit’s decision, employers will be able to obtain refunds for FICA taxes paid on severance payments.
Given this legal landscape, employers that have paid a substantial amount of severance in recent years should consider filing a protective claim with the IRS for a refund of FICA taxes paid. Such a filing will extend the period of time for which FICA contributions on severance could be recovered, should the Supreme Court eventually rule against the IRS. (Employers in the Sixth Circuit – Michigan, Ohio, Kentucky and Tennessee – are in an even better position, as they may be able to obtain a refund if the Supreme Court simply declines to hear the Quality Stores case.) The deadline for filing a protective claim for severance paid in 2009 is April 15, 2013. For severance paid in 2010, the deadline for filing a protective claim is April 15, 2014.
For many years the IRS has generally treated severance pay as “wages” subject to FICA. Payments to terminated employees are treated as “supplemental unemployment benefits”—rather than wages subject to FICA—only if the severance payments were coordinated with the receipt of state unemployment insurance benefits and complied with other rules articulated by the IRS. (See, e.g., IRS Revenue Rulings 56-249, 58-128 and 90-72.) The IRS’s position was affirmed in 2008 by the U.S. Court of Appeals for the Federal Circuit in CSX Corp. v. United States, 518 F.3d 1328, 1344 (Fed. Cir. 2008). However, in the recent Quality Stores decision, the Sixth Circuit disagreed with the IRS’s and the Federal Circuit’s interpretation of the relevant statutory provisions and created a split in the circuits.
The filing of a protective claim for a refund involves the taxpayer’s filing a set of amended Form 941 quarterly returns using Form 941-X for those quarters that are still considered open and requesting a refund, in this case, based upon the Quality Stores decision. The amended Forms 941 would be filed with a cover letter and Form 8275, which discloses that the amended returns and associated refund requests are contrary to published IRS guidance; in this case Revenue Rulings 56-249 and 90-72, but supported by the Sixth Circuit’s decision.
The IRS will likely disallow the refund request based upon the Revenue Rulings cited above. Ordinarily a lawsuit to recover the refund would need to be filed within two years of the date of the notice of disallowance. However, the IRS may agree to extend that two-year limitations period through the use of Form 907, which the IRS often does when the circuit courts are split on the issue.
The extension of the limitations period leaves open the possibility of recovering the FICA taxes paid for the years for which the protective claim was filed, as well as for any subsequent tax years (provided they are still open). As noted above, for FICA tax purposes, 2009 and subsequent years are still open, and the last date for filing a protective claim for a refund for amounts paid in 2009 is April 15, 2013.
Please contact Tom Hancuch (+1 (312) 609 7824), Kelly Starr (+1 (312) 609 7768) or any other Vedder Price attorney with whom you have worked if you would like to discuss the potential filing of a protective claim for your organization.