Federal Circuit Rejects Blanket SUB Pay FICA Tax Exemption in CSX -- IRS May Soon Issue Denials of Protective Refund Claims

Employee Benefits Alert
03.14.08

Last week, the U.S. Court of Appeals for the Federal Circuit reversed the decision of Court of Federal Claims in CSX Corp. v. United States, 52 Fed. Cl. 208 (2002). See CSX Corp. v. United States, 2008 U.S. App LEXIS 4849, 2008 WL 597590 (Fed. Cir. 2008). The lower court had held that all severance payments satisfying the definition of supplemental unemployment benefits (“SUB”), as defined in section 3402(o) of the Internal Revenue Code (the “Code”), are non-wages and, therefore, not subject to Federal Insurance Contribution Act (“FICA”) taxes. The IRS takes the position that all “dismissal payments” are subject to FICA taxes unless the payments satisfy the criteria set forth in Rev. Rul. 90-72, 1990-2 C.B. 211 and Rev. Rul. 56-249, 1956-1 C.B. 488. On appeal, the Federal Circuit acknowledged that certain severance payments that fit “within the broad definition of SUB pay in section 3402(o)(2)(A)” may not be wages for FICA tax purposes, but it limited those qualifying circumstances to the scenarios set forth in Rev. Rul. 90-72 and Rev. Rul. 56-249. The court concluded that CSX did not establish (or attempt to establish) that the SUB benefits at issue satisfied the requirements for non-wage treatment as described in the Revenue Rulings, thereby affirming the IRS’s denial of CSX’s refund claims.

Many employers have filed protective refund claims related to the payment of SUB benefits since the Court of Federal Claims issued its 2002 opinion in CSX (there were a total of three lower court opinions addressing various issues) (52 Fed. Cl. 208 (2002)). The IRS has held most of those protective refund claims in abeyance pending the conclusion of the CSX litigation. The question now is how to proceed? Until CSX announces whether it will petition the U.S. Supreme Court for review, taxpayers and the IRS remain in a holding pattern. CSX will likely petition the Federal Circuit for a rehearing or a rehearing en banc. CSX will have 90 days (possibly extendable for another 60 days) to appeal the Federal Circuit’s decision to the Supreme Court. The time will begin to run from a denial of the rehearing request if one is sought. If CSX does not appeal, the IRS will likely issue denials of the SUB pay refund claims that have been held in abeyance. Protective refund claims for 2004 SUB pay would need to be filed by April 15, 2008. Unless CSX announces that it will not petition the Supreme Court for review prior to April 15, taxpayers may still want to consider filing protective refund claims for 2004 SUB payments to keep the issue open.

For more information, please contact any of the following lawyers:

Michael Lloyd, mlloyd@milchev.com, 202-626-1589

Fred Oliphant, foliphant@milchev.com, 202-626-5834

Marianna Dyson, mdyson@milchev.com, 202-626-5867

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