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SUPREME COURT OF THE UNITED STATES
_________________
No. 12–1408
_________________
UNITED STATES, PETITIONER v. QUALITY STORES,
INC., et al.
on writ of certiorari to the united states
court of appeals for the sixth circuit
[March 25, 2014]
Justice Kennedy
delivered the opinion of the Court.
This case presents the
question whether severance pay-ments made to employees terminated
against their will are taxable wages under the Federal Insurance
Contri-butions Act (FICA), 26 U. S. C. §3101
et seq.
The Court of Appeals
for the Sixth Circuit held that the payments are not wages taxed by
FICA. To reach its holding, the Court of Appeals relied not on
FICA’s definition of wages but on §3402(o) of the
Internal Revenue Code, a provision governing income-tax
withholding. That conclusion, for the reasons to be discussed, was
incorrect.
FICA’s broad
definition of wages includes the severance payments made here. And
§3402(o) does not alter that definition. Section 3402(o)
instructs that any severance payment “shall be treated as if
it were a payment of wages.” According to the Court of
Appeals, §3402(o) suggeststhat the definition of wages for
income-tax withholding does not extend to severance payments; and
so, the argument continues, severance payments also must be beyond
the terms of FICA’s similar definition. But §3402(o) is
entirely compatible with the proposition that some or all payments
do fall within the broad definition of the term wages. Section
3402(o) was enacted in response to a narrow, specific problem
regarding income-tax withholding. In addition, were the Court to
rule that the severance payments made here are exempt from FICA
taxation but not from withholding under §3402 for income-tax
pur-poses, it would contravene the holding in Rowan Cos. v. United
States, 452 U. S. 247 (1981) , which held there should be
congruence in the rules for FICA and income-tax withholding.
I
Quality Stores, Inc.,
an agricultural-specialty retailer, entered bankruptcy proceedings
in 2001. Before and following the filing of an involuntary Chapter
11 bankruptcy petition, respondents Quality Stores and affiliated
companies, all referred to here as Quality Stores, terminated
thousands of employees. The employees received severance payments,
which all parties to this case stipulate were the result of a
reduction in work force or discontinuance of a plant or operation.
The payments were made pursuant to one of two different termination
plans. (For reasons later to be explained, it should be noted that
neither termination plan tied severance payments to the receipt of
state unemployment compensation.)
Under the first plan,
terminated employees received severance pay based on job grade and
management level. The president and chief executive officer
received 18 months of severance pay, senior managers received 12
months of severance pay, and other employees received one week of
severance pay for each year of service.
The second plan was
designed to facilitate Quality Stores’ postbankruptcy
operations and encourage employees to put off their job searches.
To receive severance pay, employees had to complete their last day
of service as determined by the employer. Officers received between
6 and 12 months of severance pay, and full-time employees and
employees paid by the hour received one week of severance pay for
every year of service if the employees had been employed for at
least two years, up to a stated maximum of severance pay. Workers
who had been employed for less than two years received a week of
severance pay.
Quality Stores reported
the severance payments as wages on W–2 tax forms, paid the
employer’s required share of FICA taxes, and withheld
employees’ share of FICA taxes. Then Quality Stores asked
3,100 former employees to allow it to file FICA tax refund claims
for them. About 1,850 former employees agreed to allow Qual-ity
Stores to pursue FICA refunds. On its own behalf and on behalf of
the former employees, Quality Stores filed for a refund of
$1,000,125 in FICA taxes. The Internal Revenue Service neither
allowed nor denied the claim.
Quality Stores
initiated a proceeding in the Bankruptcy Court seeking a refund of
the disputed amount. The Bankruptcy Court granted summary judgment
in its favor. The District Court and Court of Appeals for the Sixth
Circuit affirmed, concluding that severance payments are not
“wages” under FICA. See In re Quality Stores,
Inc., 693 F. 3d 605 (2012). Other Courts of Appeals, however,
have concluded that at least some severance payments do constitute
wages subject to FICA tax. See, e.g., CSX Corp. v. United States,
518 F. 3d 1328 (CA Fed. 2008); University of Pittsburgh v.
United States, 507 F. 3d 165 (CA3 2007); North Dakota State
Univ. v. United States, 255 F. 3d 599 (CA8 2001). The United
States, claiming that the FICA taxes must be withheld, sought
review here; and certiorari was granted, 570 U. S. ___
(2013).
II
A
The first question is
whether FICA’s definition of “wages” encompasses
severance payments. The beginning pointis the relevant statutory
text. Mississippi ex rel. Hoodv. AU Optronics Corp., 571
U. S. ___, ___ (2014) (slip op., at 5).
To fund benefits
provided by the Social Security Act and Medicare, FICA taxes
“wages” paid by an employer or re-ceived by an employee
“with respect to employment.” 26 U. S. C.
§§3101(a), (b), 3111(a), (b). Congress chose to define
wages under FICA “broadly.” Mayo Foundation for Medical
Ed. and Research v. United States, 562 U. S. ___, ___ (2011)
(slip op., at 2). FICA defines “wages” as “all
remuneration for employment, including the cash value of all
remuneration (including benefits) paid in any medium other than
cash.” §3121(a). The term “employment”
encompasses “any service, of whatever nature, performed
. . . by an employee for the person employing him.”
§3121(b).
Under this definition,
and as a matter of plain meaning, severance payments made to
terminated employees are “remuneration for employment.”
Severance payments are, of course, “remuneration,” and
common sense dictates that employees receive the payments
“for employment.” Severance payments are made to
employees only. It wouldbe contrary to common usage to describe as
a severance payment remuneration provided to someone who has not
worked for the employer. Severance payments are made in
consideration for employment—for a “service
. . . performed” by “an employee for the
person employing him,” per FICA’s definition of the
term “employment.” Ibid.
In Social Security Bd.
v. Nierotko, 327 U. S. 358 (1946) , the Court interpreted the
term “wages” in the Social Security statutory context
to have substantial breadth. In that case a worker, who had been
wrongfully terminated, sought to have his backpay counted as
taxable wages for the purpose of obtaining credits under the Social
Security system. The Court stated that the term
“service,” used with respect to Social Security,
“means not only work actually done but the entire
employer-employee relationship for which compensation is paid to
the employee by the employer.” Id., at 365–366.
As confirmation of that
principle, severance payments often vary, as they did here,
according to the function and seniority of the particular employee
who is terminated. For example, under both termination plans,
Quality Stores employees were given severance payments based on job
grade and management level. And under the second termination plan,
nonofficer employees who had served at least two years with their
company received more in severance pay than nonofficer employees
who had not—a standard example of a company policy to reward
employees for a greater length of good service and loyalty.
In this respect
severance payments are like many other benefits employers offer to
employees above and beyond salary payments. Like health and
retirement benefits, stock options, or merit-based bonuses, a
competitive severance payment package can help attract talented
employees. Here, the terminations leading to the severance payments
were triggered by the employer’s involuntary bankruptcy
proceeding, a prospect against which employees may wish to protect
themselves in an economy that is always subject to changing
conditions.
Severance payments,
moreover, can be desirable from the perspective of the employer as
an alternative or supplemental form of remuneration. In situations
in which Chapter 11 bankruptcy reorganization is necessary, an
employer may seek to retain goodwill by paying its terminated
employees well, thus reinforcing its reputation as a worthy
employer. Employers who downsize in a period of slow business may
wish to retain the ability to rehire employees who have been
terminated.
A specific exemption
under FICA for certain termination-related payments reinforces the
conclusion that the payments in question are well within the
definition of wages. Section 3121(a)(13)(A) exempts from
taxablewages any severance payments made “because of
. . . retire-ment for disability.” That exemption
would be unnecessary were severance payments in general not within
FICA’s definition of “wages.” Cf. American Bank
& Trust Co. v. Dallas County, 463 U. S. 855, 864 (1983)
(declining to read a statute in a manner that would cause
“spe-cific exemptions” to be
“superfluous”). FICA’s definitional section,
moreover, provides a lengthy list of specific exemptions from the
definition of wages. For example, FICA exempts from wages payments
on account of disability caused by sickness or accident, cash
payments made for domestic service in a private home under a
certain amount, and cash tips less than a certain amount. See
§§3121(a)(2)(A), (7)(B), (12)(B). The specificity of
these exemptions reinforces the broad nature of FICA’s
definition of wages.
FICA’s statutory
history sheds further light on the text of §3121, which
defines the term “wages.” FICA was originally enacted
in Title VIII of the Social Security Act, 49Stat. 636. (In 1939,
Title VIII was transferred to the Internal Revenue Code and became
FICA. 53Stat. 1387.) Title VIII contained, in substance,
definitions of “wages” and “employment”
identical to those FICA now provides. See §811(a), 49Stat.
639; §811(b), ibid. With respect to the Social Security Act,
in 1936 the Treasury Department promulgated a regulation stating
that the statutory definition of “wages” included
“dismissal pay.” Bureau of Internal Revenue,
Employees’ Tax and the Employers’ Tax Under Title VIII
of the Social Security Act, 1 Fed. Reg. 1764, 1769 (1936). Congress
responded a few years later, in 1939, by creating an exception from
“wages” for “[d]ismissal payments which the
employer is not legally required to make.” Social Security
Act Amendments of 1939, §606, 53Stat. 1384 (codified at 26 U.
S. C. §1426(a)(4) (1940 ed.)).
In 1950, however,
Congress repealed that exception. Social Security Act Amendments,
§203(a), 64Stat. 525–527. “When Congress acts to
amend a statute, we presume it intends its amendment to have real
and sub-stantial effect.” Stone v. INS, 514 U. S. 386,
397 (1995) . Congress has not revisited its 1950 amendment; and
since that time, FICA has contained no exception for severance
payments.
B
The next question is
whether §3402(o) of the Internal Revenue Code relating to
income-tax withholding is a limitation on the meaning of
“wages” for FICA purposes. Section 3402 provides:
“(o) Extension of withholding to certain
payments other than wages.
“(1) General
rule
“For purposes of
this chapter (and so much of subtitle F as relates to this
chapter)—
“(A) any
supplemental unemployment compensation benefit paid to an
individual,
. . . . .
“shall be treated as if it were a payment
of wages by an employer to an employee for a payroll
period.”
(Pursuant to stipulations by the parties, the
Court of Appeals determined that the severance payments constitute
“supplemental unemployment compensation benefits,” or
SUBs. See §3402(o)(2)(A). The Court assumes, for purposes of
this case, that this premise is correct.)
Quality Stores argues
that §3402(o)’s instruction that SUBs be treated
“as if” they were wages for purposes of income-tax
withholding is an indirect means of stating that the definition of
wages for income-tax withholding does not cover severance payments.
It contends, further, that if the definition of wages for purposes
of income-tax withholding does not encompass severance payments,
then severance payments are not covered by FICA’s similar
definition of wages.
The Court disagrees
that §3402(o) should be read as Quality Stores suggests. The
chapter governing income-tax withholding has a broad definition of
the term “wages”: “all remuneration
. . . for services performed by an employee for his
employer, including the cash value of all remuneration (including
benefits) paid in any medium other than cash.” §3401(a).
The definitional section for income-tax withholding, like the
definitional section for FICA, contains a series of specific
exemptions that reinforce the broad scope of its definition of
wages. The provision exempts from wages, for example, any
remuneration paid for domestic service in a private home, for
services rendered to a foreign government, and for services
performed by a minister of a church in the course of his duties.
§§3401(a)(3), (5), (9). Severance payments are not
exempted, and they squarely fall within the broad textual
definition of wages for purposes of income-tax withholding under
§3401(a), for the same reasons outlined above with respect to
FICA’s similar definition of wages.
Quality Stores contends
that, the broad wording of the definition in §3401(a) aside,
severance payments must fall outside the definition of wages for
income-tax withholding. Otherwise, it argues, §3402(o) would
be superfluous. But, as the Government points out,
§3402(o)’s command that all severance payments be
treated “as if” they were wages for income-tax
withholding is in all respects consistent with the proposition that
at least some severance payments are wages. As the Federal Circuit
explained when construing §3402(o), the statement that
“all men shall be treated as if they were six feet tall does
not imply that no men are six feet tall.” CSX Corp., 518
F. 3d, at 1342.
In the last of its
textual arguments, Quality Stores draws attention to the boldface
heading of §3402(o), which states, “Extension of
withholding to certain payments other than wages.” It
contends the heading declares that the payments enumerated within
§3402(o) are “other than wages.” Captions, of
course, can be “a useful aid in resolving” a statutory
text’s “ambiguity.” FTC v. Mandel Brothers, Inc.,
359 U. S. 385 –389 (1959). But Quality Stores cannot rely on
the statutory heading to support its argument that §3402(o),
without ambiguity, excludes all severance payments from the
definition of wages. The heading states that withholding is
extended to “certain payments.” This falls short of a
declaration that all the payments listed in §3402(o) are not
wages.
Next, the regulatory
background against which §3402(o) was enacted illustrates the
limited nature of the problem the provision was enacted to address.
For this purpose, it is instructive to concentrate on the statutory
term “supplemental unemployment benefits,” which
defines the scope of §3402(o)’s income-tax withholding
mandate.
The concept of SUBs
originated in labor demands for a guaranteed annual wage. When it
became clear this was “impractical in their industries,
unions such as the Steelworkers and the United Auto Workers
transformed their guaranteed annual wage demands into proposals to
supplement existing unemployment compensation programs.”
Coffy v. Republic Steel Corp., 447 U. S. 191, 200 (1980) . A
SUB plan, as originally conceived, offered “second-level
protection against layoff” by supplementing unemployment
benefits offered by the States. Ibid.
In the 1950’s,
major American employers such as Ford Motor Company adopted SUB
plans of this type, agreeing to fund trusts that would provide SUBs
to terminated employees. For example, Ford’s contract with
employees defined the concept of SUBs as the receipt of “both
a state system unemployment benefit and a Weekly Supplemental
Benefit . . . without reduction of the state system
unemployment benefit because of the payment of the Weekly
Supplemental Benefit.” Note, Effect of Receiving Supplemental
Unemployment Benefits on Eligibility for State Benefits, 69 Harv.
L. Rev. 362, 364, n. 11 (1955); seeJ. Becker, Guaranteed
Income for the Unemployed: The Story of SUB (1968). Employer plans
that provided SUBs sought “to provide economic security for
regular employees” and “to assure a stable work force
through periods of short-term layoffs.” Coffy, supra, at
200.
But an obstacle arose.
For these plans to work, it was necessary to avoid having the SUBs
defined under federal law as “wages.” That was because
some States only provided unemployment benefits if terminated
employees were not earning “wages” from their
employers. See Brief for United States 29; CSX Corp., supra, at
1334–1335; Note, 69 Harv. L. Rev., at 366 (“The
typical state unemployment compensation statute provides that
‘an individual shall be deemed unemployed in any week with
respect to which no wages are payable to him and during which he
performs no services . . .’ ” (ellipsis and
emphasis in original)); id., at 367 (“[S]tates tend to treat
as ‘wages’ those items which the federal government
treats as ‘wages’ ”).
The inability of
terminated employees to receive state unemployment benefits, of
course, would render SUBs far less useful to them and their
employers. Employers, as a consequence, undertook to ensure that
the Federal Government did not construe benefits paid out by SUB
plans as “wages.” CSX Corp., supra, at
1334–1335.
In at least partial
response to the prospect of differential treatment of SUBs based on
the vagaries of state law, the IRS promulgated a series of Revenue
Rulings in the 1950’s and 1960’s that took the position
that SUB payments were not “wages” under FICA as well
as for purposes of income-tax withholding. Rev. Rul. 56–249,
1956–1 Cum. Bull. 488; see Rev. Rul. 58–128,
1958–1 Cum. Bull. 89; Rev. Rul. 60–330,
1960–2 Cum. Bull. 46; see also IRS Technical Advice
Memorandum 9416003, 1993 WL 642695 (Apr. 22, 1994) (hereinafter TAM
9416003).
Although the IRS
exempted SUBs paid to terminated employees from withholding for
income-tax purposes, the payments still were considered taxable
income. Rev. Rul. 56–249, 1956–1 Cum. Bull. 488.
As a result, terminated employees faced significant tax liability
at the end ofthe year. The Treasury Department suggested Congress
authorize the agency to promulgate regulations allowing voluntary
withholding. Statements and Recommendations of the Department of
the Treasury: Hearings on H. R. 13270 before the Senate
Committee on Finance, 91st Cong., 1st Sess., 905–906
(1969).
In 1969, Congress chose
instead to address the withholding problem by enacting
§3402(o). It provides that all severance payments—that
is, both SUBs as well as severance payments that the IRS considered
wages—shall be “treated as if” they were wages
for purposes of income-tax withholding. It is apparent that the
definition Congress adopted in §3402(o) is not limited to the
SUBs that the IRS had deemed exempt from wages under FICA. See
§3402(o)(2)(A). It must be presumed that Congress was aware
that §3402(o) covered more than the severance payments that
were excluded from income-tax withholding. Not all severance
payment plans were tied to state unemployment benefits; and, before
§3402(o)’s 1969 enactment, the IRS ruled that severance
payments not linked to state unemployment benefits were wages for
purposes of income-tax withholding. See Rev. Rul. 65–251,
1965–2 Cum. Bull. 395; see also TAM 9416003 (the
IRS’ original 1956 exception for SUBs provided “a
limited exception from the definition of wages for . . .
federal income tax withholding . . . only if the payments
are de-signed to supplement the receipt of state unemployment
compensation and are actually tied to state unemployment
benefits”); ibid. (“SUB-pay plans must be designed to
supplement unemployment benefits . . .”).
Once this background is
understood, the Court of Appeals’ interpretation of
§3402(o) as standing for some broad definitional principle is
shown to be incorrect. Although Congress need not have agreed with
the Revenue Rulings to enact §3402(o), its purpose to
eliminatethe withholding problem caused by the differential
treatment of severance payments is the necessary background to
understand the meaning and purpose of the provision. The problem
Congress sought to resolve was the prospect that terminated
employees would owe large payments in taxes at the end of the year
as a result of the IRS’ exemption of certain SUBs from
withholding. It remained possible that the IRS would determine that
other forms of SUB plans, perhaps linked differently to state
unemployment benefits, should be exempt from withholding. If
Congress had only incorporated the Revenue Rulings already in
effect, that response may have risked the withholding problem
arising once again. On the other hand, by drawing a withholding
requirement that was broader than then-current IRS exemptions,
Congress avoided these practical problems. A requirement that a
form of remuneration already included as wages be treated “as
if” it were wages created no administrative difficulties.
The Court of Appeals
understood Congress’ decision to include within §3402(o)
a larger set of SUBs than was already exempt from withholding under
IRS Revenue Rulings to mean that all SUBs were excluded from the
definition of wages. But that assumption, although in the abstract
not necessarily an illogical inference, is unsustainable,
considering the regulatory background against which §3402(o)
was enacted. Congress interpreted the Revenue Rulings not at all as
a definitive gloss on the meaning of the term “wages”
in §3401. The better reading is that Congress determined that,
whatever position the IRS took with respect to certain categories
of severance payments, the problem with withholding should be
solved by treating all severance payments as wages requiring
withholding.
The necessary
conclusion is that §3402(o) does not narrow the term
“wages” under FICA to exempt all severance payments.
This reasoning is consistent with Rowan, a previous decision
interpreting FICA. In Rowan, the Court held that Treasury
Regulations interpreting “wages”un-der FICA to include
the value of meals and lodging were invalid. The Government
conceded, for income-tax purposes, that the taxpayer in Rowan was
correct to exempt the value of the meals and lodging in computing
the wages properly withheld under §3402. 452 U. S., at
250–251. But it argued, nevertheless, that the value of the
meals and lodging was taxable as wages under FICA, pursuant to
Treasury Regulations. The Rowan Court observed that the definition
of wages under FICA was in substance the same as for purposes of
withholding. Id., at 255. The Court read that similarity to be
“strong evidence that Congress intended ‘wages’
to mean the same thing under FICA . . . and
income-tax withholding.” Ibid. To support that conclusion,
the Court noted a “congressional concern for ‘the
interest of simplicity and ease of
administration.’ ” Ibid. (quoting S. Rep. No.
1631, 77th Cong., 2d Sess., 165 (1942)). Because “Congress
intended . . . to coordinate the income-tax
withholding system with FICA” in order “to promote
simplicity and ease of administration,” the Court held that
it would be “extraordinary” for Congress to intend the
definitions of “wages” to vary between FICA and
income-tax withholding. 452 U. S., at 257.
The specific holding of
Rowan—that regulations governing meals and lodging were
invalid—has little or nobearing on the issue confronting us
here. What is of im-portance is the major principle recognized in
Rowan: 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.
Quality Stores contends
that, under the mandate of §3402(o), severance payments are
not subject to FICA taxation but are to be deemed wages for
purposes ofincome-tax withholding. It justifies this differential
treat-ment in the name of uniformity. But that so-called uniformity
as to the definitions of wages (i.e., that severance payments are
not wages) is not consistent with the broad textual definitions of
wages under FICA and income-tax withholding. Nor is it consistent
with this Court’s holding that administrative reasons justify
treating severance payments as taxable for both FICA and income-tax
purposes. To read Congress’ command to withhold severance
payments as an implicit overruling of the broad definition of wages
in FICA would disserve the statutory text and the congressional
interest in administrative simplicity deemed controlling in
Rowan.
In concluding, the
Court notes that the IRS still provides that severance payments
tied to the receipt of state unemployment benefits are exempt not
only from income-tax withholding but also from FICA taxation. See,
e.g., Rev. Rul. 90–72, 1990–2 Cum. Bull. 211.
Those Revenue Rulings are not at issue here. Because the severance
payments here were not linked to state unemployment benefits, the
Court does not reach the question whether the IRS’ current
exemption is consistent with the broad definition of wages under
FICA.
* * *
The severance
payments here were made to employees terminated against their will,
were varied based on job seniority and time served, and were not
linked to the receipt of state unemployment benefits. Under
FICA’s broad definition, these severance payments constitute
taxable wages. The judgment of the Court of Appeals for the Sixth
Circuit is reversed, and the case is remanded for further
proceedings consistent with this opinion.
It is so ordered.
Justice Kagan took no
part in the consideration or decision of this case.