Tax — income tax — severance pay

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U.S. Supreme Court

Civil

Tax — income tax — severance pay

Severance payments are taxable wages for FICA purposes.

The Internal Revenue Code chapter governing income-tax withholding does not limit the meaning of “wages” for FICA purposes. Like FICA’s definitional section, §3401(a) has a broad definition of “wages” and contains a series of specific exemptions. Section 3402(o) instructs that “supplemental unemployment compensation benefits” or SUBs, which include severance payments, be treated “as if” they were wages. Contrary to Quality Stores’ reading, this “as if” instruction does not mean that severance payments fall outside the definition of “wages” for income-tax withholding purposes and, in turn, are not covered by FICA’s definition. Nor can Quality Stores rely on §3402(o)’s heading, which refers to “certain payments other than wages.” To the extent statutory headings are useful in resolving ambiguity, see FTC v. Mandel Brothers, Inc., 359 U. S. 385, 388–389, §3402(o)’s heading falls short of declaring that all the payments listed in §3402(o) are “other than wages.” Instead, §3402(o) must be understood in terms of the regulatory background against which it was enacted. In the 1950’s and 1960’s, because some States provided unemployment benefits only to terminated employees not earning wages, IRS Rulings took the position that severance payments tied to the receipt of state benefits were not wages. To address the problem that severance payments were still considered taxable income, which could lead to large year-end tax liability for terminated workers, Congress enacted §3402(o), which treats both SUBs and severance payments the IRS considered wages “as if” they were wages subject to withholding. By extending this treatment to all SUBs, Congress avoided the practical problems that might arise if the IRS later determined that SUBs besides severance payments linked to state benefits should be exempt from withholding. Considering this regulatory background, the assumption that Congress meant to exclude all SUBs from the definition of “wages” is unsustainable. That §3402(o)does not narrow FICA’s “wages” definition is also consistent with the major principle of Rowan Cos. v. United States, 452 U. S. 247: that simplicity of administration and consistency of statutory interpretation instruct that the meaning of “wages” should be in general the same for income-tax withholding and for FICA calculations.

693 F. 3d 605, reversed and remanded.

12-1408 U.S. v. Quality Stores Inc.

Kennedy, J.