For U.S. Tax Courts and the Internal Revenue Service (IRS), the question of severance pay being taxable is settled. It generally is. Internal Revenue Code (IRC) §61(a)(1), IRC §101-140, Thomas G. Henk Jr. v. Comm. A narrow exception comes when the severance pay is tied to unemployment insurance claims and payments.
However, recently, in U.S. v. Quality Stores Inc., the Sixth Circuit Court of Appeals held that severance pay, though gross income, was not subject to FICA, even if tied to unemployment insurance claims and payments, as long as the wages were 1) paid to an employee; 2) pursuant to an employer's plan; 3) because of an employee's involuntary separation from employment; 4) resulting directly from a reduction in force, the discontinuance of a plant or operation, or other similar conditions; and 5) included in the employee's gross income are not subject to FICA.
The Quality Stores Inc. decision not only is in direct conflict with the IRS and U.S. Tax Courts, it conflicts with CSX Corp. v. United States where the U.S. Court of Appeals, Federal Circuit held that a payment that is remuneration for the overall employment relationship, such as severance pay, is subject to FICA.
While the U.S. Supreme Court may ultimately be required to settle this dispute, the IRS may be faced with an expensive dilemma if thousands of taxpayers who had FICA tax withheld from their severance pay, request a refund.
Givner & Kaye focuses on sophisticated income tax planning and compliance, tax litigation and procedure, estate planning, and asset protection plans for individuals and businesses in Beverly Hills, Calabasas, West Los Angeles, Hollywood, and other areas of Los Angeles, Orange, Ventura, San Bernardino, Riverside and Santa Barbara Counties. Call Los Angeles Estate Planning and Asset Protection Plan Attorneys Givner & Kaye at (310) 207-8008 today.