(Reuters) — The Supreme Court ruled on Tuesday that taxes are due for Social Security and Medicare on severance packages paid to workers who are laid off involuntarily, overturning a lower court ruling that could have triggered a wave of payroll tax refund requests from businesses.
In a win for the Obama administration and the Internal Revenue Service, the court voted 8-0 that Quality Stores Inc., a defunct Midwest-based retailer, and its employees are not entitled to tax refunds totaling about $1 million.
The tax refund at issue was small, but the IRS said the stakes in the case were huge because, if Quality Stores had won, thousands more refund claims could have resulted, possibly totaling as much as $1 billion.
The dispute centered on whether severance paid to involuntarily terminated workers was taxable under the Federal Insurance Contributions Act tax which helps pay for Social Security retirement pensions and Medicare health insurance. FICA tax is paid by a company and its employees.
In September 2012, the 6th U.S. Circuit Court of Appeals ruled that Quality Stores' severance payments to former employees were not wages and so were not taxable under FICA.
That decision was overturned by the Supreme Court, with Justice Elena Kagan recused in the case.
“Under FICA's broad definition, these severance payments constitute taxable wages,” said Justice Anthony Kennedy, in an 18-page opinion for the court.