United States v. Quality Stores Inc.


Are supplemental unemployment benefits paid to laid-off employees considered “wages” under the Federal Insurance Contributions Act (FICA), and therefore taxable as income?

In 2001, Quality Stores made severance payments to employees who were involuntarily terminated after Quality Stores filed for Chapter 11 bankruptcy. Quality Stores later argued that the payments should not have been taxed as wages under the Federal Insurance Contributions Act (FICA). When the IRS did not respond to Quality Stores’ claim seeking a $1 million refund in FICA taxes, Quality Stores commenced an adversary action in bankruptcy court. The bankruptcy court ruled for Quality Stores, concluding that the severance payments were non-taxable supplemental unemployment benefits (SUBs). The district court and Sixth Circuit affirmed. The Supreme Court will determine whether severance payments to involuntarily terminated employees are taxable wages under FICA. The Court will resolve a circuit split between the Sixth and Federal Circuits in a decision that will affect all employers who provide severance pay. At stake are billions of dollars in FICA tax refunds to employers and their former employees.

Questions as Framed for the Court by the Parties: 

Whether severance payments made to employees whose employment was involuntarily terminated are taxable under the Federal Insurance Contributions Act (“FICA”), 26 U.S.C. 3101 et seq.



In October 2001, involuntary Chapter 11 bankruptcy proceedings commenced against Quality Stores, the largest agriculture-specialty retailer in the United States at the time. See In re Quality Stores, Inc., et al., 693 F.3d 605, 608 (6th Cir. 2012).

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