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Supreme Court Rules on the Taxability of Severance

U.S. Supreme CourtOn Tuesday March 25, 2014, the U.S. Supreme Court issued its opinion in United States v. Quality Stores Inc., finding that severance compensation is subject to tax under the Federal Insurance Contribution Act (FICA), overturning a September 2012 Sixth Circuit Court of Appeals ruling that could have meant refunds estimated at over a billion dollars to both employers and employees. 

In an eighteen-page opinion, Justice Kennedy, on behalf of the Court wrote, “[u]nder FICA’s broad definition, [the] severance payments constitute taxable wages.” This decision will likely result in the denial of all applicable protective claims filed to this point. 

Based on this decision, the potential for a refund of taxes paid on applicable severance payments has been virtually eliminated. At this point, the IRS may release a statement indicating it considers this matter closed and/or simply issue denial letters for claims already submitted, but at this time, further litigation in this matter is not expected.
 Learn about leveraging tax credits and incentives with help from ADP.



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