On Tuesday, March 25, 2014, the U.S. Supreme Court ruled in favor of the Internal Revenue Service in a dispute over the payroll tax treatment of certain types of severance compensation. The justices, in an 8-0 vote, overturned the Sixth Circuit’s opinion in Quality Stores, Inc., which had held that severance pay made in connection with an involuntary separation from employment due to a reduction in force, plant shutdown or similar condition (so–called “supplemental unemployment compensation benefits”) is not subject to tax under the Federal Insurance Contribution Act (FICA).
The stakes in the case were huge because, if Quality Stores, Inc. had won, thousands of additional tax refund claims would likely have resulted, with a total cost to the government of as much as $1 billion.