The IRS has released guidance on the application of the decision in Quality Stores, Inc., et al., 2014-1 ustc ¶50,228, 134 S. Ct. 1395, to claims for refund of employment taxes paid with respect to severance payments. The Supreme Court held that the severance payments at issue were wages subject to Federal Insurance Contributions Act (FICA) tax. During the years prior to the decision, the IRS received over 3,000 refund claims for FICA, Railroad Retirement Tax Act (RRTA), and Federal Unemployment Tax Act (FUTA) taxes paid with respect to severance payments. These claims were disallowed by the IRS, prompting a number of taxpayer appeals, which were suspended pending the outcome of the Quality Stores litigation.
Under Rev. Rul. 90-72, 1990-2 CB 211, supplemental unemployment compensation benefits that are linked to the receipt of state unemployment compensation, and that satisfy certain other requirements, are excludable from wages for FICA, FUTA, and income tax withholding purposes, and are excludable from compensation for RRTA tax purposes. In Quality Stores, the parties agreed that the payments at issue did not satisfy the requirements for the narrow exclusion from FICA tax contained in Rev. Rul. 90-72. Accordingly, the Supreme Court did not address whether the exclusion from FICA taxes set forth in the Revenue Ruling for certain payments linked to state unemployment benefits is consistent with the definition of wages under FICA. Rev. Rul. 90-72 remains effective. The IRS addressed three sorts of claims:
• Claims for refund of FICA, RRTA, or FUTA taxes paid with respect to severance payments that do not satisfy Rev. Rul. 90-72. The IRS will disallow all refund claims for the listed taxes that do not satisfy the narrow exclusion contained in Rev. Rul. 90-72. This includes all claims that were suspended pending resolution of Quality Stores, as well as all claims that were filed by taxpayers in the jurisdiction of the Sixth Circuit Court of Appeals (Quality Stores reversed a holding from that circuit).
• Appeal requests relating to disallowed claims for FICA, RRTA, or FUTA taxes. The IRS will take no further action on the appeal requests that were suspended pending resolution of Quality Stores. These refund claims were already fully disallowed by the IRS.
• Appeal requests relating to other issues. If a taxpayer’s appeal had an additional basis besides that addressed in Quality Stores, or concerned payments that satisfied Rev. Rul. 90-72, the taxpayer should contact Laird MacMillan at (651) 726-1473 for information on how to proceed with the appeal request for that portion of the disallowed claim. Otherwise, the IRS will take no action on the appeal request. The two-year period for filing suit in District Court or the Court of Federal Claims began on the date the disallowance letter was mailed by certified or registered mail, and that period was not suspended by the filing of an appeal request. (IRS Announcement 2015-8, IRB 2015-9, March 2, 2015.)
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