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United States v. Quality Stores, Inc.

United States Supreme Court

March 25, 2014


Argued January 14, 2014


[134 S.Ct. 1396] Syllabus [*]

Respondent Quality Stores, Inc., and its affiliates (collectively Quality Stores) made severance payments to employees who were involuntarily terminated as part of Quality Stores' Chapter 11 bankruptcy. Payments—which were made pursuant to plans that did not tie payments to the receipt of state unemployment insurance—varied based on job seniority and time served. Quality Stores paid and withheld, inter alia, taxes required under the Federal Insurance Contributions Act (FICA), 26 U.S.C. § 3101 et seq. Later believing that the payments should not have been taxed as wages under FICA, Quality Stores sought a refund on behalf of itself and about 1, 850 former employees. When the Internal Revenue Service (IRS) did not allow or deny the refund, Quality Stores initiated proceedings in the Bankruptcy Court, which granted summary judgment in its favor. The District Court and Sixth Circuit affirmed, concluding that severance payments are not wages under FICA.


The severance payments at issue are taxable wages for FICA purposes. Pp. 1399-1405, 134 S.Ct. 1395, 188 L.Ed.2d, at 419-425.

(a) FICA defines "wages" broadly as "all remuneration for employment." §3121(a). As a matter of plain meaning, severance payments fit this definition: They are a form of remuneration made only to employees in consideration for employment. "Employment" is "any service . . . performed .. by an employee" for an employer. §3121(b). By varying according to a terminated employee's function and seniority, the severance payments at issue confirm the principle that "service" "mea[ns] not only work actually done but the entire employer-employee relationship for which compensation is paid." [134 S.Ct. 1397] Social Security Bd. v. Nierotko, 327 U.S. 358, 365-366, 66 S.Ct. 637, 90 L.Ed. 718. This broad definition is reinforced by the specificity of FICA's lengthy list of exemptions. The exemption for severance payments made "because of . . . retirement for disability, " §3121(a)(13)(A), would be unnecessary were severance payments generally not considered wages. FICA's statutory history sheds further light on the definition. FICA originally contained definitions of "wages" and "employment" identical in substance to the current ones, but in 1939, Congress excepted from "wages" "[dismissal payments" not legally required by the employer, 53 Stat. 1384. Since that exception was repealed in 1950, FICA has contained no general exception for severance payments. Pp. 1399—1401, 134 S.Ct. 1395, 188 L.Ed.2d, at 419-421.

(b) The Internal Revenue Code chapter governing income-tax withholding does not limit the meaning of "wages" for FICA purposes. Like FICA's definitional section, § 3401(a) has a broad definition of "wages" and contains a series of specific exemptions. Section 3402(o) instructs that "supplemental unemployment compensation benefits" or SUBs, which include severance payments, be treated "as if they were wages. Contrary to Quality Stores' reading, this "as if instruction does not mean that severance payments fall outside the definition of "wages" for income-tax withholding purposes and, in turn, are not covered by FICA's definition. Nor can Quality Stores rely on §3402(o)'s heading, which refers to "certain payments other than wages." To the extent statutory headings are useful in resolving ambiguity, see FTC v. Mandel Brothers, Inc., 359 U.S. 385, 388-389, 79 S.Ct. 818, 3 L.Ed.2d 893, § 3402(o)'s heading falls short of declaring that all the payments listed in §3402(o) are "other than wages." Instead, § 3402(o) must be understood in terms of the regulatory background against which it was enacted. In the 1950's and 1960's, because some States provided unemployment benefits only to terminated employees not earning wages, IRS Rulings took the position that severance payments tied to the receipt of state benefits were not wages. To address the problem that severance payments were still considered taxable income, which could lead to large year-end tax liability for terminated workers, Congress enacted §3402(o), which treats both SUBs and severance payments the IRS considered wages "as if they were wages subject to withholding. By extending this treatment to all SUBs, Congress avoided the practical problems that might arise if the IRS later determined that SUBs besides severance payments linked to state benefits should be exempt from withholding. Considering this regulatory background, the assumption that Congress meant to exclude all SUBs from the definition of "wages" is unsustainable. That §3402(o) does not narrow FICA's "wages" definition is also consistent with the major principle of Rowan Cos. v. United States, 452 U.S. 247, 101 S.Ct. 2288, 68 L.Ed.2d 814: that simplicity of administration and consistency of statutory interpretation instruct that the meaning of "wages" should be in general the same for income-tax withholding and for FICA calculations. Pp. 1401 -1405, 134 S.Ct. 1395, 188 L.Ed.2d, at 421-425.

693 F.3d 605, reversed and remanded.

Eric J. Feigin, Washington, DC, for Petitioner.

Robert S. Hertzberg, Southfield, MI, for Respondents.

[134 S.Ct. 1398] Donald B. Verrilli, Jr., Solicitor General, Kathryn Keneally, Assistant, Attorney General, Malcolm L. Stewart, Deputy Solicitor General, Eric J. Feigin, Assistant to the Solicitor General, Kenneth L. Greene, Francesca Ugolini, Attorneys, Department of Justice, Washington, DC, for Petitioner.

Robert S. Hertzberg, Counsel of Record, Pepper Hamilton LLP, Southfield, MI, Michael H. Reed, Pepper Hamilton LLP, Philadelphia, PA, Deborah Kovsky-Apap, Lesley S. Weiwarth, Pepper Hamilton LLP, Southfield, ML for Respondents.

KENNEDY, J., delivered the opinion of the Court, in which all other Members joined, except KAGAN, J., who took no part in the consideration or decision of the case.


Kennedy, Justice

This case presents the question whether severance payments made to employees terminated against their will are taxable wages under the Federal Insurance Contributions Act (FICA), 26 U.S.C. § 3101 et seq.

The Court of Appeals for the Sixth Circuit held that the payments are not wages taxed by FICA. To reach its holding, the Court of Appeals relied not on FICA's definition of wages but on § 3402(o) of the Internal Revenue Code, a provision governing income-tax withholding. That conclusion, for the reasons to be discussed, was incorrect.

FICA's broad definition of wages includes the severance payments made here. And § 3402(o) does not alter that definition. Section 3402(o) instructs that any severance payment "shall be treated as if it were a payment of wages." According to the Court of Appeals, § 3402(o) suggests that the definition of wages for income-tax withholding does not extend to severance payments; and so, the argument continues, severance payments also must be beyond the terms of FICA's similar definition. But § 3402(o) is entirely compatible with the proposition that some or all payments do fall within the broad definition of the term wages. Section 3402(o) was enacted in response to a narrow, specific problem regarding income-tax withholding. In addition, were the Court to rule that the severance payments made here are exempt from FICA taxation but not from withholding under § 3402 for ...

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