Certain severance benefits may not be subject to taxation under
the Federal Insurance Contributions Act (FICA), according to a
recent district court decision. In United States v. Quality
Stores, Inc., No. 1:09-cv-44 (W.D. Mich. Feb. 23, 2010), a
decision affirming a bankruptcy court decision, the U.S. District
Court for the Western District of Michigan highlighted the
historical uncertainty regarding whether certain severance payments
made to employees are subject to taxation under FICA. In this
episode, the court held that such payments were not subject to
FICA, as they did not constitute "wages."
In Quality Stores, the debtors (Quality Stores)
operated retail stores. Prior to declaring bankruptcy, they were
forced to close approximately 63 stores and nine distribution
centers, and terminated approximately 75 employees at their
corporate offices. On Oct. 20, 2001, an involuntary chapter 11
bankruptcy petition was filed against them. Quality Stores then
closed their
