Supplemental unemployment compensation benefits not subject to FICA.

• Author: Beavers, James A.
• Position: Federal Insurance Contributions Act

The Sixth Circuit held that supplemental unemployment compensation benefit payments were not wages for FICA purposes and therefore not subject to FICA.

[ILLUSTRATION OMITTED]

Background

Quality Stores was the largest agricultural-specialty retailer in the country, serving farmers, hobby gardeners, skilled trade persons, and do-it-yourself customers. In October 2001, the company went into Chapter 11 bankruptcy. As a result of the bankruptcy, the company discontinued operations and eventually terminated all its employees.

Quality Stores made severance payments to the involuntarily terminated employees. The severance payments resulted directly from a reduction in force or the discontinuance of a plant or operation. Quality Stores made the severance payments pursuant to a prebankruptcy petition plan and a post-bankruptcy petition plan.

Quality Stores reported the payments from both plans as wages on the employees' W-2 forms and withheld federal income tax. Quality Stores also paid the employer's share of FICA tax and withheld each employee's share of FICA tax. For the taxable quarters ending Dec. 31, 1999, through June 30, 2002, Quality Stores filed timely Forms 941, Employer's Quarterly Federal Tax Return, reporting wages paid to employees and remitted the applicable FICA taxes.

Although Quality Stores collected and paid the FICA tax, it did not agree with the IRS that the severance payments constituted wages for FICA purposes. Quality Stores took the position that the payments made to its employees pursuant to the plans were not wages but instead constituted supplemental unemployment compensation benefit payments (SUB payments) that were not taxable under FICA. Quality Stores asked 3,100 former employees to allow the company to file FICA tax refund claims on their behalf. Of those contacted, 1,850 former employees allowed the company to pursue FICA tax refunds for them.

In September 2002, Quality Stores timely filed with the IRS 15 Forms 843, Claim for Refund and Request for Abatement, seeking the refund of $1,000,125 in FICA tax. This amount consisted of $571,127 for the employer's share and $428,998 for the employees' share attributed to those employees who granted the company consent to pursue their claims. When the IRS did not allow or deny the refund claims, Quality Stores filed an adversary action in the bankruptcy court in June 2005.

The bankruptcy court held in favor of Quality Stores and ordered a full refund of the FICA taxes paid...