UNITED STATES v. QUALITY STORES
In October 2001, Quality Stores -- a national company -- and its affiliates commenced bankruptcy proceedings. When laying off employees, Quality Stores issued severance pay as part of its employees’ gross income and reported the payments for federal income tax purposes as “wages” on W-2 forms. As required for “wages”, the Federal Insurance Contributions Act (FICA) tax was paid on severance payments. FICA is a tax imposed on wages earned to fund Social Security and Medicare; both employer and employee pay part of the tax. The employee's part is withheld from his paycheck. Quality Stores contends that severance pay does not qualify as “wages”, but rather payments under a Supplemental Unemployment Benefit (SUB) plan that are not taxable under FICA. SUB is a corporate program that creates severance payments in the event of involuntary termination; SUB payments do not qualify as “wages” under FICA because they are given after termination of a job rather than for work completed.
Based on this line of reasoning, Quality Stores filed for a refund from the Internal Revenue Service (IRS). The IRS did not respond to Quality Stores' request for a refund, neither by allowing the claim nor denying it, and Quality Stores sued the IRS. The federal district court agreed with Quality Stores’ view on severance payments. The U.S. Court of Appeals for the Sixth Circuit affirmed the district court and held that severance pay satisfies the elements Congress set out to determine SUB payments, which therefore makes such payments exempt from FICA taxes.
Are severance payments for employees who were involuntarily terminated taxable under the Federal Insurance Contributions Act?
Legal provision: Federal Insurance Contributions Act (FICA)
Yes. Justice Anthony M. Kennedy delivered the opinion for the 8-0 majority. The Court held that the Federal Insurance Contributions Act’s broad definition of wages did include severance pay. Because the statutory definition of wages in FICA is “remuneration for employment,” the fact that the employment has ended is irrelevant, as the severance pay is still remuneration for services rendered when the workers were still employed. The Court also held that the specific exemptions that FICA lays out indicate that anything not specifically included in the exemptions should be considered taxable wages. Given the legislative history surrounding the issue, the appropriate reading is that severance payments should be treated as wages and subject to the withholding of taxes.
Justice Elena Kagan took no part in the discussion or decision of this case.
ORAL ARGUMENT OF ERIC J. FEIGIN ON BEHALF OF THE PETITIONER
Chief Justice John G. Roberts: We will hear argument next in Case 12-1408, United States v. Quality Stores.
Eric J. Feigin: Thank you, Mr. Chief Justice, and may it please the Court:
The payments in this case fall squarely under FICA's definition of wages, which includes all remuneration for employment.
Consistent with the purpose of FICA to fund the Social Security and Medicare programs, this Court has construed the term "employment" broadly to encompass the entire employer-employee relationship.
The payments here, which were paid only to Respondent's employees and were keyed to the employees' positions, salary levels, and length of service, clearly were part of the employer-employee relationship.
Two particular features of the statute, I think, make especially clear that separation-related payments like this are covered.
First, the basic definition of wages, both historically and currently, has been subject to specific exclusions for certain types of separation-related pay such as retirement pay.
Those exclusions would be unnecessary if the basic definition of wages didn't cover separation-related payments.
Second, one of the historical exclusions, which was in the statute from 1939 to 1950, was for certain types of dismissal payments.
When Congress eliminated the exception for certain types of dismissal payments in 1950, the accompanying House report made clear what would already have been in any event implicit in the repeal itself, which is that from that point forward, all dismissal payments, which were -- Congress understood in the House report to include any payment on account of an employee's involuntary separation, would be considered wages under FICA.
Respondent's reliance in this case on Section 3402(o) is misplaced.
Section 3402(o) is a substantive rule of income tax withholding, but is expressly limited in its effect to Chapter 24, which is the income tax withholding chapter, and related procedural provisions.
It has no bearing on the definition of wages for purposes of FICA.
In any event--
Justice Ruth Bader Ginsburg: Well, don't we have a decision that says that the -- the term FICA purposes and income tax?
Eric J. Feigin: --Well, two points about that, Your Honor.
First of all, nothing in this Court's decision in Rowan suggests that this Court or any court needs to look to substantive rules of income tax withholding to determine the basic definition of wages for purposes of FICA.
I think it's clear from the preamble to Section 3402(o) that Congress was focused on Chapter 24 and was trying to solve a specific problem within Chapter 24, the income tax withholding chapter, and it didn't intend to send essentially shock waves through the Internal Revenue Code that would affect the definition of wages in other chapters.
Second, Respondent's view, I think, would undercut the basic principle animating Rowan, which is the idea that the definitions of wages should be congruent for purposes of administrability.
Respondent's reading, which would say that none of the payments specified in Section 3402(o)(2)(a) can possibly be considered wages for FICA purposes, but nevertheless must be treated as wages for withholding purposes, would require employers to keep separate track of wages for the two different purposes and report them separately when they do W-2 forms for the employees or their own 941 tax returns.
Now, Respondents have conceded that Section 3402(o) did not modify the preexisting definition of FICA or the income tax withholding chapter.
Instead, their argument seems to be that the definition of FICA, even before Section 3402(o) was enacted, contained a hole precisely the size and shape of the definition of supplemental unemployment compensation benefits that Congress later codified in Section 3402(o)(2)(a).
Now, they haven't pointed to a single statutory provision, regulation, or revenue ruling that would have given Congress that view.
There is simply no reason to believe that that hole existed before the enactment of Section 3402(o) and its common ground that it doesn't exist after Section 3402(o).
It's also important to understand why Congress enacted Section 3402(o).
Congress enacted Section 3402(o) in response to a suggestion by the Treasury Department in 1969 that there was a problem with supplemental unemployment benefit payments.
IRS itself had used in a series of revenue rulings that considered certain payments by employers that were intended to supplement State unemployment compensation benefits, and the IRS in those rulings had determined that those benefits were not wages.
Now, the IRS in 1969 informed Congress that because these benefits were considered non-wages, it was creating a problem, namely, that income taxes weren't being withheld and the recipients of the payments were receiving large income tax bills at the end of the year.
Congress enacted Section 3402(o) to address that specific problem.
It did not intend to modify the definition of wages.
It -- nothing in the Section 3402(o) can be taken as a commentary on the definition of wages that was enacted--
Justice Anthony Kennedy: Either then or now, were the supplemental unemployment benefit payments subject to FICA withholding or are they now exempt under the present--
Eric J. Feigin: --So supplemental unemployment benefits, as defined by the IRS in its revenue rulings, were subject neither to withholding nor to taxation under FICA.
Justice Anthony Kennedy: --And after (o) was passed?
Eric J. Feigin: After (o) was passed, those wages--
Justice Anthony Kennedy: It's obviously subject to Federal income tax withholding.
What about FICA?
Eric J. Feigin: --They still were not subject to FICA tax.
Justice Anthony Kennedy: Okay.
And is that still true now?
Eric J. Feigin: That's still true now under the current revenue ruling, Your Honor.
Chief Justice John G. Roberts: Why -- I might have missed a step here.
Why were they getting big tax bills if they're not wages?
Eric J. Feigin: Well, they were still considered to be income under the revenue rulings.
So the effect of that was that they were receiving pavements during the year that were considered income and as to which they would owe income tax, but the income tax wasn't being regularly withheld as -- as it is supposed to be on wages, and therefore at the end of the year, they'd receive a large income tax bill for those payments.
If the Court has no further questions, I'll reserve the balance--
Justice Ruth Bader Ginsburg: I have a question about the effect of the government's position.
In the States, if these -- if we say these benefits qualify as wages for FICA purposes, then what about the States that say we supply unemployment compensation only if there is not another source of unemployment compensation?
Eric J. Feigin: --Your Honor, if the Court adopts the government's position in this case, there's not going to be any change in the States because the government's position is the status quo.
Now, there are certain States that do look to the Federal definition of "wages" in order to determine whether an individual qualifies for unemployment benefits under State law.
And if the Court were to reach some other conclusion in this case than the one the -- the government is urging, it is possible that there could be some effect in those States on qualification for State unemployment benefits.
But since State unemployment benefit qualification is largely a matter of State law, the States could adjust to that however they saw fit.
Justice Anthony Kennedy: Is it ever to the long-term advantage to the employee to have FICA withholding, so that the employee's account is greater and the benefits are greater?
Eric J. Feigin: So for -- certain employees may want that -- certain payments to count as wages because the definition of FICA purposes is identical to the definition of "wages" under the Social Security Act.
And under the Social Security Act, the accrual of benefits is based on -- on wages.
So some employees may want to have earned more wages.
However, in this case, they're not making that argument.
They're simply arguing that they shouldn't have to pay taxes on these payments which were made, again, only to employees, were keyed to the employees' positions, salaries and length of service and clearly meet FICA's definition of "wages".
If the Court has no further questions, I'll--
Justice Samuel Alito: What if the payments were not keyed to the length of service and to salary?
It was just a flat severance payment.
Eric J. Feigin: --We still think that would meet the basic definition of FICA, Your Honor, and would still count as wages and be taxable under FICA.
I think this case is even easier than that because the payments were clearly keyed to critical aspects of the employment relationship.
Indeed, in the case of the post-petition payments, the payments were expressly conditioned on the employee's willingness to remain performing services for Respondents during the pendency of the bankruptcy proceedings.
Justice Samuel Alito: Well, in the Coffy case, the Court drew a distinction between compensation for services and payments that are contingent on the employee's being thrown out of work.
But that -- why doesn't that apply here?
Eric J. Feigin: So Coffy was addressing not FICA, but a statute that dealt with veterans' rights returning to work after a period of military service.
As construed by this Court, that statute drew a distinction between a reward for length of service, to which the returning veteran was entitled, and short-term compensation for services rendered to which the returning benefit -- returning veteran -- excuse me -- was not entitled.
Now, that distinction doesn't exist under FICA.
Even if a particular payment is considered a reward for length of service, as this Court held that the payments in Coffy were, it would still be remuneration for services under FICA's definition of wages.
For example, if you were to give an employee an award after 20 years of service, that would clearly be a reward for length of service and would qualify as such under Coffy, but would not be remuneration for employment.
Now, the specific question you asked, Justice Alito, about the difference between payments that are part of the continuing employment and payments that occur at the end of the employment relationship, is also not a distinction that FICA draws.
As I said earlier, there are a number of historical and current exclusions for certain types of payments that are triggered by the end of the employment relationship.
For example, from 1954 to 1983 the statute expressly excluded retirement pay.
I don't think there is a reasonable reading of the basic definition of FICA that would include retirement pay but exclude severance payments.
And again, I think it's very pertinent here, and probably the best piece of evidence we have in this case about congressional intent, that Congress from 1939 to 1950 excluded from the basic definition of FICA certain types of dismissal payments, by which it meant payments on account of involuntary separation; and then it eliminated that exclusion in 1950, making clear both as a statutory matter and it's clear in the legislative history that such payments, that is payments on account of involuntary separation, would from that point forward be covered as wages under FICA.
If the Court has no further questions, I will reserve my time.
Chief Justice John G. Roberts: Thank you, counsel.
ORAL ARGUMENT OF ROBERT S. HERTZBERG ON BEHALF OF THE RESPONDENTS
Robert S Hertzberg: Mr. Chief Justice, and may it please the Court:
The Government -- the Government agrees that some SUB payments are not wages.
Where the dispute lies is what SUB payments are covered by FICA and which are not.
If the payments meet the definition of SUB payment under the statute, then they are not wages and not subject to FICA.
Justice Antonin Scalia: What are you saying, SUB payments> ["]?
Robert S Hertzberg: --Supplemental unemployment benefits.
Justice Antonin Scalia: I'm not hip.
Robert S Hertzberg: The Government says they are now wages if they meet the definition as they particularly see it in a particular revenue ruling that they issue at some point in time; and that's where the dispute lies.
It is our position that SUB payments is not remuneration for services because it is contingent, as indicated previously on the Coffy case, upon losing your job.
There is a problem on the public policy issue that the Government is telling the Court today, and the problem is if what they say is SUB pay is tied to State unemployment benefits, then it is not wages and subject to FICA.
They say if it's -- if you receive supplemental unemployment benefits but you do not receive State unemployment, then it is subject to FICA taxes and is wages.
So, what they are saying to the Court is if you have the ability to receive both the supplemental unemployment benefits and the State unemployment benefits, then we are not going to tax you with FICA taxes, but if you only receive less, being just the supplemental unemployment benefits, then it is going to be wages and then it's going to be subject to FICA taxes.
Justice Sonia Sotomayor: Can you win at all if I think their regulation is irrational and contrary to the statute?
Robert S Hertzberg: Yes.
Justice Sonia Sotomayor: I know that's not before us, but--
Robert S Hertzberg: Yes.
Justice Sonia Sotomayor: --how do you win, assuming I just say I don't pay any attention to the regulation?
Robert S Hertzberg: Your Honor, it's our position that the statute is clear.
When you look at the definition of FICA statute and the withholding statute, they are almost identical.
And if you look at the Rowan case, the Rowan case says that you should read the statutes consistently for ease of administration.
It is clear--
Justice Sonia Sotomayor: Isn't it easier to withhold taxes on both?
Robert S Hertzberg: --Pardon me?
Justice Sonia Sotomayor: Isn't it easier to withhold taxes on both?
Robert S Hertzberg: Well, what they are withholding on the withholding is income taxes.
They are not withholding wages.
And that's why -- because it doesn't fit the definition of wages.
If you look at 3121, which is the FICA statute, supplemental unemployment benefit is not remuneration for services.
Justice Ruth Bader Ginsburg: If it is treated for income tax purposes as wages, why shouldn't it be treated for FICA tax purposes?
Robert S Hertzberg: --Your Honor--
Justice Ruth Bader Ginsburg: What your are saying is on the income side they are treated as wages; on the FICA side they're not treated as wages.
Robert S Hertzberg: --Your Honor, supplemental unemployment benefits are provided to an individual to provide a safety net when they lose their job, to cover them during the period while they seek new employment.
To then tax the individual with FICA taxes doesn't make sense, because you are taking away the money that the individual needs as a safety net; and to take money away in order to provide for the funding of Medicare or Social Security doesn't make sense.
Justice Antonin Scalia: Why are they giving them the money, just out of love?
I mean, they don't give it to me when I retire.
They only give it to their employees when they retire.
What -- what are they paying them for?
Aren't they paying them for faithful and good past services?
Robert S Hertzberg: No, what they're doing is they're--
Justice Antonin Scalia: No, they are -- they are just being generous?
Robert S Hertzberg: --They are putting in place a plan in order to protect the employee in the event of a layoff or a plant closing.
Justice Antonin Scalia: Why don't they do that for me?
Robert S Hertzberg: I don't know, Your Honor.
Justice Ruth Bader Ginsburg: There are some severance payments that do count for FICA purposes, isn't that so?
Robert S Hertzberg: Your Honor, FICA purposes; but we believe the definition is different for supplemental unemployment benefits.
Under -- dismissal payments are for involuntary termination.
It can be because of a firing or a cancellation of an employment contract, where supplemental unemployment benefits are based upon a plan and are given to an individual because of a plant closing or a layoff.
Justice Samuel Alito: What if Section 3402(o) did not exist?
Would these severance payments fall within FICA's definition of wages then?
Robert S Hertzberg: No.
Justice Samuel Alito: And why not?
Robert S Hertzberg: --The reason is that because, if you look at how they are treated, even the Government acknowledges that some supplemental unemployment benefits are now wages.
And if you look as far back as 1960, when 501(c)(17) was enacted dealing with trusts and their exemption from the taxes, the definition of "supplemental unemployment benefits" has always had its own definition.
And it's always been treated -- in 1977, for example, the revenue ruling that the Government issued said that supplemental unemployment benefits of any kind are not -- are not -- wages and subject to FICA.
In 1986 Congress reenacted the withholding statute and the FICA statute with the knowledge that 1977 revenue ruling was in place; and therefore, it's presumed that FICA taxes are not -- or that supplemental unemployment benefits are not subject to FICA taxes.
The Government has stipulated that the payments made in this case to the Quality Stores employees met the definition of supplemental unemployment benefits.
And as I began to indicate, the Rowan case said that you should read statutes consistently and for ease of administration.
When you look at 3121, being the FICA statute, along with 3401, the definition of "wages" is almost identical.
Justice Stephen G. Breyer: It is, but it -- really, if you have anything -- the definition is very broad.
I mean, it says
""wages" means all remuneration for employment. "
All remuneration -- wages means all remuneration for employment paid basically for any service of whatever nature performed by an employee.
Now, I agree with you that it's the same definition for the withholding.
But Congress, it passes the withholding change with conflicting interpretations.
So it wouldn't be the first time that Congress passed a statute to say: We don't care what the conflicting interpretations are; ignoring that, you are going to withhold this money, period.
And it said, whether it's other than wages or not.
I grant you, they might have thought they had to pass it, but so?
Robert S Hertzberg: Well, if SUB--
Justice Stephen G. Breyer: We could also look at it as they didn't have to pass it.
It was subject to withholding anyway.
Robert S Hertzberg: --If SUB pay was wages, there would have been no need to pass 3402.
Justice Stephen G. Breyer: Well, no, there would have been a need, if different people think different things.
So you want to be sure.
Robert S Hertzberg: Well--
Justice Stephen G. Breyer: I mean, Congress does that quite a lot.
It -- it -- on certain, different people tell them different things.
They say, we don't care; do it anyway.
And that's what this statute basically says: Withhold anyway.
Robert S Hertzberg: --Well--
Justice Stephen G. Breyer: And maybe -- could we say that?
Could we say, well, in our opinion you are right.
Both statutes cover supplemental unemployment benefits.
It's never come up in the other context since this because Congress wanted to be sure it was withheld.
Robert S Hertzberg: --I don't think you can, based upon when you look at what the statute says, 3402(o).
It says that they should be treated as if they are wages.
If they were already wages, there would have been no necessity of treating them if they were wages.
If you also look at the title of the section, it says "other than wages".
It's clear that if it was wages, they wouldn't use the word "other than wages".
And if you look at the legislative history also, it says in three different places that they're not wages and also indicates it's not remuneration for services.
So the reason that 3402(o) was enacted was because of the 1968 Treasury regulation that had the reporting of supplemental unemployment benefits on a 1099 form.
That's clearly not a wage form.
If it's wages, you report on a W-2.
So there would have been no need for enactment of 3402(o) if they were already wages.
Justice Ruth Bader Ginsburg: Could you review again, what is -- what is the relevant distinction between dismissal payments that are subject to FICA and payments that are not?
Robert S Hertzberg: Your Honor, dismissal payments are involuntary termination.
Justice Ruth Bader Ginsburg: It has to be involuntary?
Robert S Hertzberg: Yes.
And there -- and that also is the beginning part of when you look at SUB payments.
Justice Ruth Bader Ginsburg: And SUB payments are all voluntary?
Robert S Hertzberg: All involuntary terminations.
But that's where they differ at that point.
Justice Ruth Bader Ginsburg: You -- well, you told me that the dismissal payments are involuntary.
How about the supplemental?
Are they ever and always voluntary?
Robert S Hertzberg: No, they're -- they're involuntary payments, also, or based upon involuntary termination.
The difference is supplemental unemployment benefits are paid pursuant to a plan, and they are also based upon a layoff or a plant closing.
And a dismissal payment, for example, which is a separate category, and treated separately in the Treasury regulations, is an involuntary termination.
And that's where it ends.
And it can be based upon a loss of employment through a firing or a cancellation of a contract.
Justice Stephen G. Breyer: I'll take it that you're right, that Congress that passed the withholding statute thought it fell outside of the definition of wages, but they were wrong.
Now, that wouldn't be the first time either.
So -- but Congress did think it.
So what weight am I supposed to give to what Congress thought then about what an earlier Congress, namely, the Congress that passed the wage definition in the withholding statute thought?
Robert S Hertzberg: You should give it, Your Honor, a lot of weight.
And the reason you should is because in 1986, the withholding and the FICA statutes were reenacted in full, including 3402(o).
And at that point in time, there was a revenue ruling in place that said that all supplemental unemployment benefits are not wages and not subject to FICA.
And under the legislative reenactment, Congress would have been presumed to have been aware of that revenue ruling that was in place.
Justice Stephen G. Breyer: Well, yes.
But that was so much the more so, you see?
They had authority saying it wasn't wages.
That doesn't mean that authority was correct.
And -- and so that's why they passed the statute.
Robert S Hertzberg: But what the important aspect is, is that it's not remuneration for services.
In the Coffy case, which was not directly dealing with whether it was remuneration or not, indicated that supplemental unemployment benefits are given to an individual because of the loss of a job.
And as I indicated in the -- even the government has indicated that some supplemental unemployment benefits are not wages and subject to FICA.
Where we differ is, is that we say all of them are not wages and not subject to FICA.
What the government says is, no, we'll issue a revenue ruling and we flip flopped our position several times on the different revenue rulings, but whatever revenue ruling we happen to issue at this point in time will determine whether the supplemental unemployment benefits qualify as wages for FICA purposes or are not wages.
It's our position that the statute is clear.
When you look at it, especially in light of 3402(o), and -- because there would have been no reason for enactment of that section if supplemental unemployment benefits were wages already, because they would have been subject to FICA.
Justice Samuel Alito: Well, the government explains 3402(o) on the ground that there had been prior admin -- IRS administrative decisions exempting certain types of SUB payments from the definition of wages.
And that -- that can explain that language.
The language that they are -- that SUB payments are to be treated as if they were wages doesn't necessarily mean that all of those SUB payments are not wages.
It does necessarily mean that at least some of them -- or suggests at least some of them are not wages.
So what's wrong with the government's explanation of the language along those lines?
Robert S Hertzberg: Because I think the language is clear.
And the language is clear because it says -- in the title, it says "other than wages".
If any of them were wages, they wouldn't have used the word "other than wages".
But looking at the statute itself and using the traditional tools of statutory interpretation, it says in the statute that they are to be treated as if they were wages.
If they were already wages, there'd have been no need for the statute.
And the legislative history shows us what Congress was thinking at that point in time, because it says in three different places, these are not wages and also it indicates it's not remuneration for services.
Justice Antonin Scalia: Was the earlier statute definition of wages for tax purposes, was that reenacted at the same time?
Robert S Hertzberg: Yes, in 1986.
Justice Antonin Scalia: So you really have -- you call into play the principle that you should interpret a statute to make sense and not interpret any provision to be superfluous, right?
Robert S Hertzberg: Correct, Your Honor.
Justice Antonin Scalia: And you say that the government's interpretation renders it superfluous.
Robert S Hertzberg: Absolutely, Your Honor.
Justice Antonin Scalia: We'll ask him about that.
Robert S Hertzberg: Thank you.
Chief Justice John G. Roberts: Thank you, counsel.
Mr. Feigin, 18 minutes.
REBUTTAL ARGUMENT OF ERIC J. FEIGIN ON BEHALF OF THE PETITIONER
Eric J. Feigin: Thank you, Mr. Chief Justice, and may it please the Court:
I first want to address Justice Sotomayor's question.
Justice Sotomayor, if you believe that the revenue rulings that the IRS has issued are irrational or invalid, the only colorable reason for believing that is because the payments that those revenue rulings classify as non-wages are clearly wages under FICA's basic definition.
And if you believe the revenue rulings are invalid for that reason, then that is all the more reason to rule for the government here, because Respondent's position would create an even bigger hole in the statute that would classify even more payments as non-wages and is even less consistent with the statute.
Justice Sonia Sotomayor: You were touching at what I was thinking.
Why don't you answer Justice Scalia's point.
Why is (o) not superfluous?
Eric J. Feigin: So, Your Honor, we acknowledge that the revenue rulings are not consistent with the statutory text of FICA.
The revenue rulings accept certain payments from classification as wages that the plain text of FICA unambiguously classify as wages.
The revenue rulings are a continuation of a practice that began in the 1950s and '60s, which was a somewhat more freewheeling time in the history of statutory interpretation.
And to the extent the IRS would defend these in a case in which they're challenged in court, it would not be because they're consistent with the text of the statute, but simply because Congress has taken the revenue rulings as a given and passed statutes that effectively assumed that the revenue rulings are being effective, as Justice Breyer pointed out.
Justice Antonin Scalia: You have to acknowledge, though, that if you read -- if you read the two sections of the statute together, the one seems to be unnecessary.
Eric J. Feigin: Well, a couple points on that, Your Honor.
Justice Antonin Scalia: "Wages" means all remuneration, including cash value of all remuneration, including benefits.
And then (o) says
"extension of withholding of certain payments other than wages. "
"For purposes of this chapter, any supplemental and unemployment compensation benefit paid to an individual shall be treated as if it were a payment of wages. "
suggesting that it really isn't.
Eric J. Feigin: Well, first, just to pick up on the textual point--
Justice Antonin Scalia: I mean, there would have been a way to fix the revenue rulings without doing it this way.
Couldn't they have done it some other way without enacting a statute that contradicted itself?
Eric J. Feigin: --Well, first of all, Your Honor, just to pick up on the textual point that Justice Alito, I think, was adverting to earlier.
Saying that particular types of payments shall be treated as if they were wages made during a payroll period doesn't mean that it's categorically impossible for such payments to have qualified as wages to begin with.
As Judge Bryson pointed out in the -- his opinion to the Federal Circuit in the CSX case, which is cited in our briefs, if you were to say to treat all men as if they were 6 feet tall, that wouldn't mean that no man could possibly be 6 feet tall.
Justice Antonin Scalia: Yes, unless it was in a section that said how to treat men who are not 6 feet tall.
The title of this section,
"extension of withholding to certain payments other than wages. "
Eric J. Feigin: Well, your Honor, it says--
Justice Antonin Scalia: I mean, it -- it clearly suggests that these are not wages.
Eric J. Feigin: --Well, first of all, Your Honor, it says, "certain payments other than wages".
Second, I would point you to the part where it says,
"treated as wages for a payroll period. "
Justice Antonin Scalia: Right.
Eric J. Feigin: And that actually has some significance in that it allows the employer to treat these as wages paid during the employer's normal payroll period, so the withholding can be performed in the same way that the employee would have withheld for normal payroll period payment and avoids the need to apply the rules that would govern in circumstances where payments are made outside of a payroll period.
And these are payments that could well have been made outside a normal payroll period, but this directs that they be treated as payments within a payroll period.
I would again point the Court back to the historical reason why 3402(o) exists.
It was enacted, as I discussed earlier, following a suggestion by the Treasury Department that there was a particular problem with withholding that needed to be solved.
Now, Justice Scalia, I suppose Congress might have solved that problem in different ways, but I think what Congress did here is it simply tried to solve the problem once and for all.
It just declared that these payments should be treated as if they were wages so that withholding would occur, thereby solving the problem that the IRS identified.
And it enacted a definition of supplemental unemployment compensation benefits that everyone agrees is broader than the set of payments that the revenue rulings up to that point had accepted.
And there are a couple of very good reasons Congress would have done it that way.
One is that, because of the IRS's case-specific approach to each of its revenue rulings, it would have been difficult, if not impossible, for Congress to craft statutory language that precisely captured the contours of the payments that the IRS either was treating or might later treat as non-wages.
Second, again, the supplemental unemployment benefit plans that are evolved in the 1950s continued to evolve and take different forms.
And I think the IRS just wanted to hedge against the possibility -- excuse me.
Congress wanted to hedge against the possibility that the IRS might later decide that a plan structured slightly differently from any plan that it had considered before should also be considered nonwages.
And there was absolutely no downside to Congress writing the definition in 3402(o)(ii)(a) more broadly than the IRS rulings had thus far had an opportunity to construe.
That's because, again as the Federal Circuit pointed out, there is no practical harm done if you treat -- if you are instructed to treat a particular payment as wages and that payment already is wages.
Now, Your Honor, to your point about surplusage, first of all, I don't think the canon against surplusage would help you construe FICA here because I think FICA is unambiguous.
I do not think there is any way to read the definition, 3402(o)(2)(a).
In any event, the only way this would be superfluous is if some court were to hold, on an issue that is not presented to the Court in this case, that the IRS has absolutely no administrative authority to craft administrative exceptions to the definition of wages for policy reasons, as it did in the revenue rulings that underlie the enactment of Section 3402(o) here.
If a court were to reach that conclusion, then Section 3402(o) might not have any operative effect.
But Congress in 1969 clearly could not have believed that the revenue rulings were ineffective or it never would have enacted Section 3402(o) in the first place.
There's no other reason Congress could have thought that certain types of supplemental unemployment benefits were excepted from the definition of "wages".
My friend on the other side mentioned these 1968 regulations.
Those regulations only applied to payments from trusts.
They didn't apply to payments, like the payments at issue in this case, that come directly from the employer.
Those regulations did not purport to construe the definition of FICA or the income tax withholding statutes.
And in fact, since 1957 there has been an income tax withholding regulation that specifically says that any payment on account of an employee's involuntary separation does constitute wages for withholding purposes.
And Congress was presumably aware of that regulation.
And again, I would just like to address one final point.
I think opposing counsel's argument about this 1986 reenactment doesn't make a great deal of sense.
I think the argument is that when Congress reenacted the statute in 1986 it was somehow adopting the then-current interpretation of the IRS in a 1977 revenue ruling.
I don't think that the enactment of Section 3402(o) originally in 1969 can be taken to have left the IRS with sufficient flexibility to change its practices during the 1970s, but that the reenactment of that very same language in 1986 would be taken to freeze for all time and -- the current IRS practices and foreclose the IRS from ever modifying those practices in the future.
Finally, Respondents point to the legislative history of 3402(o), which does contain some statements that supplemental unemployment compensation benefits aren't wages.
I think some of the reason for that legislative history is confusion about the nomenclature.
There were IRS used.
I think it is clear that Congress must have been looking at the IRS revenue rulings, again because there is simply nothing else that could have possibly given the IRS the impression that any of these types of payments weren't wages to begin with.
And I think it's very important that the Court not just look at the legislative history piecemeal, but look at the entire historical backdrop if it decides to get into any of that at all.
But we think this case is very easily resolved on the plain text of FICA, which clearly includes these payments.
We don't even think there is a need to look at Section 3402(o), which is limited in effect to the income tax withholding provisions and was enacted to solve a specific income tax withholding-related problem and not to affect FICA's basic definition of wages.
Justice Ruth Bader Ginsburg: How about that we should just ignore their revenue rulings, including the current one, and just deal with the statute?
Is that what you are suggesting?
Eric J. Feigin: Well, the revenue rulings aren't directly at issue in this case, Your Honor, because all the revenue rulings do is specify that certain payments -- not the type of payments that are issued in this case -- are not wages.
And nobody contends that the revenue rulings have any effect or any special bearing on this case, because this is a case about payments that both the IRS in its revenue rulings and Congress under the plain text of FICA would classify as wages.
Chief Justice John G. Roberts: Well, I think part of the -- the point is that the broad, capacious definition of IRS since they are carving things out, maybe not willy-nilly, but at least they don't seem that it's as broad as you do -- they don't seem to think that it's as broad as you do.
Eric J. Feigin: Well, two points to that, Your Honor.
First, again, these exceptions first came into existence in the 1950s and 1960s, and I quite candidly don't think the IRS was as careful about fidelity to text as a modern legal observer would be.
Second, if this Court were to believe that, notwithstanding the fact that the IRS's revenue rulings are indirectly at issue in this case for the reasons I said to Justice Ginsburg, if this Court believes that it cannot rule for the Government in this case on the statutory question without concluding that the revenue rulings are invalid, we still think the Court should rule for the Government on the statutory question.
We think the statutory text is clear, and that is the IRS's position notwithstanding the revenue rulings.
Justice Ruth Bader Ginsburg: And then what happens to the State compensation schemes which the revenue rulings seem to have been trying to accommodate?
Eric J. Feigin: So if this Court were to conclude that the Government is correct on a -- as a statutory matter, but we're to make clear that revenue -- the current revenue ruling, Revenue Ruling 90-72 was invalid, that might have some effect on individuals' eligibility for unemployment benefits under State law in those States that incorporate the Federal definition of wages as part of the calculation for eligibility for State unemployment benefits.
If that creates any bad results, States will be able to fix them, and I don't think that it should preclude this Court from holding what the plain text of FICA I think in this case requires.
Chief Justice John G. Roberts: Thank you, counsel.
The case is submitted.
Unknown Speaker: Justice Kennedy has the opinion of the Court today in case 12-1408 United States versus Quality Stores.
Justice Anthony Kennedy: One of the most important mechanisms in the federal taxes in this the withholding of tax from salaries and wages.
And the most substantial and evident withholding is for federal income tax.
Another tax on wages is levied by the Federal Insurance Contribution Act or FICA in the FICA tax funds Social Security benefits.
The question in this case is whether severance payments to terminated employees are subject to the FICA tax.
The withholding provision for the income tax states that in the case of severance payments, which what's involved here, the payment shall be treated as if they are wages.
And the question here is what bearing if any that section has on whether severance payments are subject to FICA taxes.
And in this case, Quality Stores and their bankruptcy proceedings, in order to keep the goodwill of employees were terminated and also they keep some employees working for a time even though they were slated for termination.
The company paid them severance payments.
Quality Stores reported the severance payments as wages on W-2 tax forms and paid the employers required share of the FICA taxes and withheld the employee share the FICA taxes.
Then, Quality Stores on its own behalf and on behalf of about 1,850 employees filed for a refund and the refund was -- the FICA taxes were just over a million dollars.
The Court of Appeals for the Sixth Circuit held that the severance payments are not subject to the FICA tax.
Other Courts of Appeals have reached the opposite in conclusion.
This Court granted certiorari.
Today's decision holds that in this case, the Court of Appeals for the Sixth Circuit was in error.
The code section that it relied upon does not control.
The severance payments are subject to the FICA tax.
The judgment of the Court of Appeals for the Sixth Circuit is reversed and the case is remanded for further proceedings.
The opinion of the Court is unanimous.Justice Kagan took no part in the consideration or decision of the case.