United States v. Quality Stores, Inc. (In Re Quality Stores, Inc.) , 693 F.3d 605 ( 2012 )


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  •                          RECOMMENDED FOR FULL-TEXT PUBLICATION
    Pursuant to Sixth Circuit Rule 206
    File Name: 12a0313p.06
    UNITED STATES COURT OF APPEALS
    FOR THE SIXTH CIRCUIT
    _________________
    X
    -
    In re: QUALITY STORES, INC., et al.,
    -
    Debtors.
    _____________________________________                       -
    -
    No. 10-1563
    ,
    >
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    UNITED STATES OF AMERICA,
    -
    -
    Appellant,
    -
    -
    -
    v.
    -
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    QUALITY STORES, INC., et al.,
    N
    Appellees.
    Appeal from the United States District Court
    for the Western District of Michigan at Grand Rapids.
    No. 09-00044—Janet T. Neff, District Judge.
    Argued: October 6, 2011
    Decided and Filed: September 7, 2012
    Before: BOGGS and STRANCH, Circuit Judges; and CARR, District Judge.*
    _________________
    COUNSEL
    ARGUED: Francesca U. Tamami, UNITED STATES DEPARTMENT OF JUSTICE,
    Washington, D.C., for Appellant. Robert S. Hertzberg, PEPPER HAMILTON LLP,
    Detroit, Michigan, for Appellees. Mary B. Hevener, MORGAN, LEWIS & BOCKIUS
    LLP, Washington, D.C., for Amicus Curiae. ON BRIEF: Francesca U. Tamami, Gilbert
    S. Rothenberg, Kenneth L. Greene, UNITED STATES DEPARTMENT OF JUSTICE,
    Washington, D.C., for Appellant. Robert S. Hertzberg, PEPPER HAMILTON LLP,
    Detroit, Michigan, Michael H. Reed, Nina M. Varughese, PEPPER HAMILTON LLP,
    Philadelphia, Pennsylvania, for Appellees. Mary B. Hevener, Christopher A. Weals,
    David R. Fuller, MORGAN, LEWIS & BOCKIUS LLP, Washington, D.C., Robert A.
    Long, COVINGTON & BURLING LLP, Washington, D.C., for Amici Curiae.
    *
    The Honorable James G. Carr, Senior United States District Judge for the Northern District of
    Ohio, sitting by designation.
    1
    No. 10-1563            United States v. Quality Stores, et al.                                     Page 2
    _________________
    OPINION
    _________________
    JANE B. STRANCH, Circuit Judge. This appeal arises from an adversary action
    filed in the bankruptcy court for the Western District of Michigan by Quality Stores,
    Inc., its affiliated companies, and certain employees (collectively Quality Stores) against
    the United States seeking a refund of $1,000,125 in taxes paid under the Federal
    Insurance Contributions Act (FICA).1 On stipulated facts and cross-motions for
    summary judgment, the bankruptcy court ordered a full refund, holding that payments
    Quality Stores made to its employees upon terminating their employment involuntarily
    due to business cessation constituted supplemental unemployment compensation benefits
    (SUB payments) that are not taxable as wages under FICA. Quality Stores, Inc. v.
    United States (In re Quality Stores, Inc.), 
    383 B.R. 67
     (Bankr. W.D. Mich. 2008). On
    appeal, the district court affirmed, United States v. Quality Stores, Inc. (In re Quality
    Stores, Inc.), 
    424 B.R. 237
     (W.D. Mich. 2010), and we now AFFIRM.
    I. FACTS
    Quality Stores was the largest agricultural-specialty retailer in the country
    serving farmers, hobby gardeners, skilled trade persons, and do-it-yourself customers.
    In October 2001, an involuntary Chapter 11 bankruptcy petition was filed against
    Quality Stores, Inc. Within two weeks, Quality Stores answered the petition and
    consented to the entry of an order for relief. Thereafter, Quality Stores’s affiliated
    companies commenced voluntary Chapter 11 bankruptcy cases.2 In May 2002, the
    bankruptcy court confirmed the First Amended Joint Plan of Reorganization.
    1
    Quality Stores is supported in this appeal by amici curiae, American Payroll Association and
    ERISA Industry Committee.
    2
    The debtors are: QSI Holdings, Inc. (f/k/a CT Holdings, Inc.), Quality Stores, Inc. (f/k/a Central
    Tractor Farm & Country, Inc.), Country General, Inc., F and C Holding, Inc., FarmandCountry.com, LLC,
    QSI Newco, Inc., QSI Transportation, Inc., Quality Farm & Fleet, Inc., Quality Investments, Inc., Quality
    Stores Services, Inc., and Vision Transportation, Inc.
    No. 10-1563        United States v. Quality Stores, et al.                         Page 3
    Prior to November 1, 2001, Quality Stores closed sixty-three stores and nine
    distribution centers and terminated the employment of approximately seventy-five
    employees in the corporate office. After November 1, 2001, Quality Stores closed its
    remaining 311 stores and three distribution centers and terminated the employment of
    all remaining employees.
    Quality Stores made severance payments to those employees whose employment
    was involuntarily terminated. The parties stipulated that the severance payments
    resulted directly from a reduction in force or the discontinuance of a plant or operation.
    Quality Stores made the severance payments pursuant to two separate plans.
    Under the terms of the Pre-Petition Severance Plan, severance pay was based on
    job grade and management level in the organization. The President and CEO received
    eighteen months of severance pay. Senior management executives received twelve
    months of severance pay, while all other managers and employees received one week
    of severance pay for each full year of service. These severance payments were not tied
    to the receipt of state unemployment compensation, and they were not attributable to the
    provision of any particular services by the employees. Quality Stores made the
    severance payments on the normal payroll schedule. Salaried employees received an
    average of 11.4 weeks of severance pay, while hourly employees received an average
    of 4.2 weeks of severance pay.
    The Post-Petition Severance Plan was designed to encourage employees to defer
    their job searches and dedicate their efforts and attention to the company by assuring
    them that they would receive severance pay if their jobs were eliminated. To be eligible
    for severance pay, an employee was required to complete the last day of service as
    scheduled. Company officers received between six and twelve months of severance pay,
    while full-time salaried and hourly employees who had been employed for at least two
    years received one week of severance pay for every full year of service, up to a
    maximum of ten weeks for salaried employees and five weeks for hourly employees.
    Those workers with less than two years of service received one week of severance pay.
    No. 10-1563        United States v. Quality Stores, et al.                       Page 4
    Severance payments made under the Post-Petition Severance Plan were not tied
    to the receipt of state unemployment compensation, nor were they attributable to the
    provision of any particular services. The post-petition severance amounts were paid in
    a lump sum, however, because the companies were liquidating and it was not practical
    administratively to pay the amounts over time. Under the Post-Petition Severance Plan,
    on average, salaried employees received 5.2 weeks of severance pay, while hourly
    employees received 3.1 weeks of severance pay. About 900 employees did not receive
    any severance pay because they were hired immediately by successor companies.
    Quality Stores did not require employees to prove that they were unemployed in
    order to receive severance pay under either plan. Because the severance payments
    constituted gross income to the employees for federal income tax purposes, Quality
    Stores reported the payments as wages on W-2 forms and withheld federal income tax.
    Quality Stores also paid the employer’s share of FICA tax and withheld each employee’s
    share of FICA tax. For the taxable quarters ending December 31, 1999, through June
    30, 2002, Quality Stores filed timely Forms 941 reporting wages paid to employees and
    remitted the applicable FICA taxes.
    Of the total $1,000,125 in FICA tax at issue, $382,362 is attributed to severance
    payments made under the Pre-Petition Severance Plan, consisting of $214,000 for the
    employer share and $168,362 for the employee share. Further, of the total amount of
    FICA tax at issue, $617,763 is attributed to severance payments made under the Post-
    Petition Severance Plan, consisting of $357,127 for the employer share and $260,636 for
    the employee share.
    Although Quality Stores collected and paid the FICA tax, it did not agree with
    the Internal Revenue Service (IRS) that the severance payments constituted wages for
    FICA purposes. Quality Stores took the position that the payments made to its
    employees pursuant to the plans were not wages but instead constituted SUB payments
    that were not taxable under FICA.
    No. 10-1563          United States v. Quality Stores, et al.                              Page 5
    Quality Stores asked 3,100 former employees to allow the company to file FICA
    tax refund claims on their behalf. See 
    Treas. Reg. § 31.6402
    (a)-2. Of those contacted,
    1,850 former employees allowed Quality Stores to pursue FICA tax refunds for them.
    In September 2002, Quality Stores timely filed with the IRS fifteen Forms 843
    seeking the refund of $1,000,125 in FICA tax.3 This figure consisted of $571,127 for
    the employer share and $428,998 for the employee share attributed to those employees
    who granted Quality Stores consent to pursue their claims. When the IRS did not allow
    or deny the refund claims, Quality Stores filed an adversary action in the bankruptcy
    court in June 2005.
    II. STANDARD OF REVIEW
    When we consider an appeal from a district court judgment in a case that
    originated in bankruptcy court, we review the bankruptcy court’s decision directly,
    without giving any deference to the district court’s decision. Stevenson v. J.C. Bradford
    & Co. (In re Cannon), 
    277 F.3d 838
    , 849 (6th Cir. 2002). Because the bankruptcy court
    decided the case on stipulated facts and cross-motions for summary judgment, our
    review is de novo. See 
    id.
    III. ANALYSIS
    The concept of SUB payments first appeared in the 1950s and “evolved from the
    demand by organized labor for a guaranteed annual wage.” Coffy v. Republic Steel
    Corp., 
    447 U.S. 191
    , 200 (1980). Because the unions’ real concern was the significant
    difference between average weekly earnings received when employed and the amount
    of unemployment benefits received when unemployed, the unions sought corporate
    supplementation of existing state unemployment compensation programs. See 
    id.
    Several industries adopted SUB plans, the purpose of which was to assure workers of
    employment security regardless of the number of hours actually worked, rather than to
    provide employees with additional compensation for work performed. 
    Id.
     SUB
    3
    The Forms 843 were filed by Central Tractor Farm & Country, Inc., Country General, Inc.,
    Quality Farm & Fleet, Inc., and Quality Stores Services, Inc.
    No. 10-1563         United States v. Quality Stores, et al.                            Page 6
    payments “cannot be compensation for work performed, . . . for they are contingent on
    the employee’s being thrown out of work; unless the employee is laid off he will never
    receive SUB payments. In this sense, SUB’s are analogous to severance payments: they
    are ‘compensation for loss of jobs.’” 
    Id.
     (quoting Accardi v. Pa. R.R. Co., 
    383 U.S. 225
    ,
    230 (1966) (“[T]he cost to an employee of losing his job is not measured by how much
    work he did in the past . . . but by the rights and benefits he forfeits by giving up his
    job.”) SUB payments are “in the nature of a reward for length of service, and do not
    represent deferred short-term compensation for services actually rendered.” Id. at 205.
    Consistent with these principles, Quality Stores developed two written plans to
    administer severance payments to the managers and hourly employees who permanently
    lost their jobs due to the cessation of business caused by bankruptcy. The related
    questions we must resolve are whether those payments constitute SUB payments under
    federal law and, if so, whether the payments are taxable under FICA.
    A. Background
    Congress imposed the FICA tax on employee wages to fund the Social Security
    and Medicare programs. Appoloni v. United States, 
    450 F.3d 185
    , 189 (6th Cir. 2006).
    Both the employer and the employee pay part of the tax. The employer collects the
    employee’s share by deducting the tax from wages as they are paid. I.R.C. §§ 3101(a),
    3102(a). The employer also pays a matching tax on the wages paid to the employee.
    I.R.C. § 3111(a).
    Congress defined “wages” for FICA purposes (with certain exceptions) as “all
    remuneration for employment, including the cash value of all remuneration (including
    benefits) paid in any medium other than cash . . . .” I.R.C. § 3121(a). “Employment,”
    as used in the statute, means “any service, of whatever nature, performed . . . by an
    employee for the person employing him . . . .” I.R.C. § 3121(b). The Supreme Court has
    explained that the words
    “any service . . . performed . . . for his employer,” with the purpose of the
    Social Security Act in mind[,] import breadth of coverage. They
    admonish us against holding that “service” can be only productive
    activity. We think that “service” as used by Congress in this definitive
    No. 10-1563        United States v. Quality Stores, et al.                          Page 7
    phrase means not only work actually done but the entire employer-
    employee relationship for which compensation is paid to the employee
    by the employer.
    Soc. Sec. Bd. v. Nierotko, 
    327 U.S. 358
    , 365–66 (1946). Thus, the Supreme Court held
    that back pay granted to an employee pursuant to an order of the National Labor
    Relations Board constituted “wages” taxable under FICA. 
    Id.
     at 369–70. Likewise, we
    have construed FICA definitions broadly and inclusively, Appoloni, 
    450 F.3d at 190
    , and
    we generally favor “that interpretation of statutory provisions which calls for
    coverage rather than exclusion,” St. Luke’s Hosp. Ass’n v. United States, 
    333 F.2d 157
    ,
    164 (6th Cir. 1964); United States v. Detroit Med. Ctr., 
    557 F.3d 412
    , 414 (6th Cir.
    2009). But in this case we must begin with the Supreme Court’s particular instruction
    that SUB pay falls outside the broad statutory meaning of service performed by an
    employee for an employer because, by definition, an employee is not eligible for SUB
    pay until service to the employer has ended and such benefits provide compensation for
    the lost job. Coffy, 
    447 U.S. at 200
    .
    B. FICA, Federal Income Tax Withholding, and “Wages”
    Whether SUB payments are “wages” under FICA is a complex question because
    the FICA statute does not expressly include or exclude SUB payments, nor do the
    Treasury regulations promulgated under FICA address the subject. Mindful of the
    Supreme Court’s admonition that SUB payments cannot, by their nature, be
    compensation for work performed, 
    id.,
     we first ask whether Congress has provided any
    direction or insight into the proper treatment of SUB payments for tax purposes.
    We observe that, for purposes of federal income tax withholding, I.R.C. § 3402,
    Congress adopted a definition of “wages” that is nearly identical to the definition of
    “wages” included in FICA. In the income tax context, “wages” means “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 . . . .” I.R.C.
    § 3401(a). In addition to this definition of “wages,” Congress expressly defined SUB
    payments for purposes of federal income tax withholding in a subsection of the statute
    No. 10-1563        United States v. Quality Stores, et al.                           Page 8
    entitled, “Extension of withholding to certain payments other than wages.” I.R.C.
    § 3402(o) (emphasis added). In that subsection of the statute, Congress defined SUB
    payments as:
    amounts which are paid to an employee, pursuant to a plan to which the
    employer is a party, because of an employee’s involuntary separation
    from employment (whether or not such separation is temporary),
    resulting directly from a reduction in force, the discontinuance of a plant
    or operation, or other similar conditions, but only to the extent such
    benefits are includible in the employee’s gross income.
    I.R.C. § 3402(o)(2)(A). This statutory definition of SUB payments is repeated in the
    corresponding Treasury Regulation, § 31.3401(a)-1(b)(14)(ii).
    Parsing this definition into its five separate elements, Congress has provided that
    a SUB payment is: (1) an amount paid to an employee; (2) pursuant to an employer’s
    plan; (3) because of an employee’s involuntary separation from employment, whether
    temporary or permanent; (4) resulting directly from a reduction in force, the
    discontinuance of a plant or operation, or other similar conditions; and (5) included in
    the employee’s gross income.
    All payments Quality Stores made to its former employees, whether under the
    Pre- or Post-Petition Plan, satisfy this five-part statutory test to qualify as SUB
    payments. The parties stipulated below that: (1) Quality Stores made the payments to
    employees; (2) pursuant to company plans; (3) because of the employees’ permanent
    separation from employment; and (4) resulting directly from a reduction in force or the
    discontinuance of a plant or operation. Although the parties’ stipulation did not contain
    any reference to gross income as contemplated by the fifth element of the statutory test,
    as a matter of law the SUB payments were included in the employees’ gross incomes.
    See I.R.C. § 61 (generally “gross income means all income from whatever source
    derived” with certain inapplicable exceptions). The statutory definition does not require
    that SUB payments be tied to an employee’s receipt of state unemployment
    compensation benefits, nor does the statute make any distinction between periodic
    payments or one-time payments made in a lump sum.
    No. 10-1563           United States v. Quality Stores, et al.                       Page 9
    Congress expressly provided that any payment made to an employee that meets
    the statutory definition of a SUB payment “shall be treated as if it were a payment of
    wages by an employer to an employee for a payroll period.” I.R.C. § 3402(o)(1)
    (emphasis added). In our view, the necessary implication arising from this phrase is that
    Congress did not consider SUB payments to be “wages,” but allowed their treatment as
    wages to facilitate federal income tax withholding for taxpayers. To the extent other
    plausible inferences might be drawn, the statute may be ambiguous.
    Our objective when interpreting statutes is to give effect to the intent of
    Congress, and if that intent is clear, then both the courts and the government agency
    charged with implementing the statute, here the IRS, must give effect to that clear
    congressional intent. See Nat’l Ass’n of Home Builders v. Defenders of Wildlife,
    
    551 U.S. 644
    , 665 (2007). If a statute is silent or ambiguous, the question we ask is
    whether the agency’s approach to interpretation is based on a permissible construction
    of the statute. 
    Id.
    Where ambiguity exists, we may use aids to statutory construction to help us
    resolve the ambiguity. We may consider the title of the statute and the legislative history
    leading to its enactment, although the title and history cannot limit the plain meaning of
    the statutory text. See Maguire v. Comm’r of Internal Revenue, 
    313 U.S. 1
    , 9 (1941);
    Fairport, P. & E.R. Co. v. Meredith, 
    292 U.S. 589
    , 594 (1934). Thus, we turn to the title
    and legislative history of § 3402(o) to assist us in determining whether the inference we
    read into the statute is consistent with congressional intent.
    The title of § 3402(o) is: “Extension of withholding to certain payments other
    than wages.” The phrase “other than wages” supports our conclusion that Congress
    knew that it was extending federal income tax withholding to payments “other than
    wages” when it enacted § 3402(o).
    Moreover, the legislative history of the statute confirms our interpretation. When
    § 3402(o) was enacted in 1969, Congress recognized that SUB payments “are not subject
    to [federal income tax] withholding because they do not constitute wages or
    No. 10-1563         United States v. Quality Stores, et al.                        Page 10
    remuneration for services.” S. Rep. No. 91-552, at 255–56 (1969), reprinted in 1969
    U.S.C.C.A.N. 2027, 2305 (emphasis added). Because SUB payments “are generally
    taxable income to the recipient,” however, Congress decided to require federal income
    tax withholding on SUB payments to alleviate any unexpected income tax burden on
    employees for the calendar year in which the payments were made. Id. Congress
    stressed “that although these benefits are not wages, since they are generally taxable
    payments they should be subject to withholding to avoid the final tax payment problem
    for employees.” Id. (emphasis added). As a result of the enactment of § 3402(o), the
    “withholding requirements . . . on wages are to apply to these non-wage payments.” Id.
    at 2306 (emphasis added).
    Because the title and legislative history clarify any ambiguity in the statute, we
    are convinced that Congress characterized SUB payments as “non-wages” and Congress
    enacted § 3402(o) simply to extend withholding to these “non-wage” payments to
    benefit taxpayers. In light of this clear congressional intent, we approve the bankruptcy
    court’s reasoning that if SUB payments are not “wages” but are only treated as if they
    were “wages” for purposes of federal income tax withholding, then SUB payments also
    are not “wages” under the nearly identical definition of that term found in the FICA
    statute. The analytical bridge for this step in our reasoning arises from the Supreme
    Court’s decision in Rowan Cos. v. United States, 
    452 U.S. 247
    , 255–57 (1981).
    C. Application of Rowan Cos. v. United States
    In Rowan, the Supreme Court examined the plain language and legislative history
    of § 3121(a) and § 3401(a) to conclude that Congress intended the term “wages” to carry
    the same meaning for purposes of FICA and federal income tax withholding. Id. at 257.
    By adopting virtually identical definitions of “wages” in the two statutes, Congress
    expressed an intent to coordinate the two statutory schemes “to promote simplicity and
    ease of administration.” Id. The Court said that “[i]t would be extraordinary for a
    Congress pursuing this interest to intend, without ever saying so, for identical definitions
    to be interpreted differently.” Id. Upon concluding that “wages” means the same thing
    under FICA as it does for federal income tax, the Supreme Court invalidated certain
    No. 10-1563        United States v. Quality Stores, et al.                       Page 11
    Treasury regulations under which the IRS characterized meals and lodging provided to
    employees as “wages” under FICA but not as “wages” for purposes of federal income
    tax withholding. Id. at 249–50, 263.
    The government contends that Congress legislatively superseded Rowan when
    it enacted the “decoupling amendment” as part of the Social Security Amendments of
    1983, Pub. L. No. 98-21, 
    97 Stat. 65
    . Without doubt, the legislative history of the
    “decoupling amendment” reveals that Congress believed the objectives of the Social
    Security system were “significantly different from the objective[s] underlying the
    income tax withholding rules” and that “amounts exempt from income tax withholding
    should not be exempt from FICA unless Congress provides an explicit FICA tax
    exclusion.” S. Rep. No. 98-23, at 42 (1983), reprinted in 1983 U.S.C.C.A.N. 143, 183.
    Thus, the legislative history explains, “the determination whether or not amounts are
    includible in the Social Security wage base is to be made without regard to whether such
    amounts are treated as wages for income tax withholding purposes. Accordingly, an
    employee’s ‘wages’ for Social Security tax purposes may be different from the
    employee’s ‘wages’ for income tax withholding purposes.” 
    Id.
     See also H.R. Rep. No.
    98-25(I), at 80 (1983), reprinted in 1983 U.S.C.C.A.N. 219, 299; H.R. Conf. Rep. No.
    98-47, at 148 (1983), reprinted in 1983 U.S.C.C.A.N. 404, 438.
    This statement of congressional intent in the legislative history might change our
    analysis if Congress had actually passed a statute expressing it. But the actual language
    Congress used when it enacted the “decoupling amendment” did not achieve its intended
    effect as expressed in the legislative history. See CSX Corp. v. United States, 
    518 F.3d 1328
    , 1344 (Fed. Cir. 2008). The decoupling amendment reads:
    Nothing in the regulations prescribed for purposes of chapter 24 (relating
    to income tax withholding) which provides an exclusion from “wages”
    as used in such chapter shall be construed to require a similar exclusion
    from “wages” in the regulations prescribed for purposes of this chapter
    [22 relating to FICA]. Except as otherwise provided in regulations
    prescribed by the Secretary, any third party which makes a payment
    included in wages solely by reason of the parenthetical matter contained
    in subparagraph (A) of paragraph (2) shall be treated for purposes of this
    chapter and chapter 22 as the employer with respect to such wages.
    No. 10-1563        United States v. Quality Stores, et al.                        Page 12
    I.R.C. § 3121(a) (emphasis added). Thus, “although the committee reports clearly state
    the intention to decouple the term ‘wages’ for purposes of income tax withholding and
    FICA,” the statutory language actually “addresses the construction of the regulations.”
    CSX Corp., 
    518 F.3d at 1344
    . The decoupling amendment does not provide that
    “wages” must be treated differently for purposes of federal income tax withholding and
    FICA; rather, the amendment as written simply allowed the United States Treasury “‘to
    promulgate regulations to provide for different exclusions from “wages” under FICA
    than under the income tax withholding laws.’” 
    Id.
     (quoting Anderson v. United States,
    
    929 F.2d 648
    , 650 (Fed. Cir. 1991) (also rejecting the government’s “decoupling
    amendment” argument)).         Importantly, the Secretary of the Treasury has not
    promulgated any regulations under the “decoupling amendment.” 
    Id.
     Therefore,
    because the language of the “decoupling amendment” is incongruent with its legislative
    history, we conclude under a plain reading of the statute that Congress did not statutorily
    supersede Rowan and that the case remains good law.
    The government cites several other cases to support its view that the “decoupling
    amendment” abrogated Rowan and that later congressional action to make the
    “decoupling amendment” retroactive removed any doubt about its impact. See New
    England Baptist Hosp. v. United States, 
    807 F.2d 280
    , 284 (1st Cir. 1986); Canisius
    Coll. v. United States, 
    799 F.2d 18
    , 21–22 (2d Cir. 1986); Temple Univ. v. United States,
    
    769 F.2d 126
    , 131–33 (3d Cir. 1985); STA of Balt.-ILA Container Royalty Fund v.
    United States, 
    621 F. Supp. 1567
    , 1575 (D. Md. 1985), aff’d, 
    804 F.2d 296
     (4th Cir.
    1986); Robert Morris Coll. v. United States, 
    11 Cl. Ct. 546
    , 550–52 (1987). These cases
    do not affect our analysis for two reasons. First, we approvingly cited Rowan and its
    holding long after these cases were decided. Gerbec v. United States, 
    164 F.3d 1015
    ,
    1026 n.14 (6th Cir. 1999). Second, these cases failed to focus on the plain meaning of
    the statute, which, as we have explained, is not in sync with its legislative history, see
    CSX Corp., 
    518 F.3d at 1344
    , and these cases did not address the Secretary’s failure to
    promulgate regulations to implement the “decoupling amendment.”
    No. 10-1563         United States v. Quality Stores, et al.                          Page 13
    We also do not agree with the government that the Supreme Court eroded Rowan
    when it decided Environmental Defense v. Duke Energy Corp., 
    549 U.S. 561
     (2007).
    In Duke Energy, the Supreme Court explained that it did not reach its decision in Rowan
    “simply because a ‘substantially identical’ definition of ‘wages’ appeared in each of the
    different statutory provisions.” 
    Id. at 575
    . Instead, the Court “relied on a manifest
    ‘congressional concern for the interest of simplicity and ease of administration.’ The
    FICA . . . regulations fell for failing to ‘serve that interest,’ not for defying definitional
    identity.” 
    Id.
     (internal citations omitted). The Supreme Court instructed that “[c]ontext
    counts,” the government argues, because there is no “‘effectively irrebuttable’
    presumption that the same defined term in different provisions of the same statute must
    ‘be interpreted identically.’” 
    Id.
     at 575–76 (internal citations omitted).
    Putting aside that we are not dealing here with the same defined term in different
    provisions of the same statute, we reject the government’s reliance on Duke Energy for
    the same reasons stated by the Federal Circuit in CSX Corp., 
    518 F.3d at
    1344 n.4.
    While the concern for simplicity and ease of administration “may be less compelling in
    other statutory settings, such as the one at issue in the Duke Energy case, there is nothing
    in the [Supreme] Court’s opinion in [Duke Energy] to suggest that it would take a
    different view of the relationship between chapter 24 and chapter 21 of the Internal
    Revenue Code, where the Rowan Court found an enhanced need for consistency.” 
    Id.
    We also cannot conclude that Rowan was eroded in Mayo Found. for Med. Educ.
    & Research v. United States, 
    131 S. Ct. 704
     (2011), where the Supreme Court held that
    stipends paid by the Mayo Foundation to medical residents who worked more than 40
    hours per week but also engaged in academic pursuits constituted “wages” under FICA.
    Applying Chevron, U.S.A., Inc. v. Natural Res. Def. Council, Inc., 
    467 U.S. 837
     (1984),
    the Supreme Court deferred to a Treasury regulation on the subject. Mayo Found.,
    131 S. Ct. at 712–13. The government contends that the Supreme Court rejected
    Rowan’s framework for examining the validity of Treasury regulations when it noted
    that “[s]ince Rowan . . . the administrative landscape has changed significantly.” Id. at
    713.
    No. 10-1563         United States v. Quality Stores, et al.                      Page 14
    We cannot agree. The aspect of Rowan that informs our present analysis is its
    instruction that the statutory term “wages” should be interpreted consistently in the
    statutes governing FICA and the federal income tax. The Supreme Court did not address
    that aspect of Rowan in Mayo Foundation. Rather, the Court concerned itself with
    Rowan’s status as a pre-Chevron case that accorded less deference to a Treasury
    regulation than is now required under Chevron. Id. at 713–14. Mayo Foundation adds
    nothing of significance to our legal analysis.
    The government argues that, even if Rowan remains good law, the result reached
    by the bankruptcy court in favor of Quality Stores is inconsistent with the thrust of
    Rowan. While the Supreme Court construed the FICA and income tax definitions of
    “wages” similarly in order to effectuate a congressional intent to promote “simplicity
    and ease of administration,” Rowan, 
    452 U.S. at 257
    , here, the government argues, the
    bankruptcy court’s decision results in different treatment of SUB payments for purposes
    of FICA and income-tax withholding, which is precisely the situation Rowan sought to
    avoid.
    This argument misses the target.        Congress imposed federal income tax
    withholding on SUB payments because they qualify as gross income, not because they
    are “wages.” Reading the definitions of “wages” found in the FICA and federal income
    tax statutes consistently, SUB payments do not constitute “wages” under either statutory
    scheme.
    Rowan remains good law, and the Federal Circuit agrees with us on this point.
    CSX Corp., 
    518 F.3d at
    1344 & n.4. That court, however, confined the congressional
    definition of SUB pay in I.R.C. § 3402(o) to federal income tax withholding only and
    did not rely on Rowan to conclude that the same statutory definition applies to FICA tax.
    Id. at 1340–42, 1345. In doing so, the Federal Circuit appears to have created an
    inconsistency within its own law. Id. at 1344 (observing that Anderson v. United States,
    
    929 F.2d 648
     (Fed. Cir. 1991), “held that the term ‘including benefits’ in the definition
    of wages under FICA must be accorded the same meaning as the identical term used in
    the income tax statutes.”) By contrast to the analysis of the Federal Circuit, we rely on
    No. 10-1563            United States v. Quality Stores, et al.                                     Page 15
    Rowan to reach the conclusion that if Congress decided to treat SUB payments as if they
    were “wages” for purposes of federal income tax withholding, then the same definition
    must apply under FICA.
    D. Summary
    Accordingly, we conclude, under the stipulated facts of this case, that the
    payments Quality Stores made to its employees pursuant to the Pre- and Post-Petition
    Plans qualify as SUB payments under I.R.C. § 3402(o). Because Congress has provided
    that SUB payments are not “wages” and are treated only as if they were “wages” for
    purposes of federal income tax withholding, such payments are not “wages” for purposes
    of FICA taxation.4 We are cognizant of our prior decision construing payments made
    to teachers in exchange for relinquishment of their statutory tenure rights as “wages”
    taxable under FICA, Appoloni, 
    450 F.3d at 196
    , but in that case we did not examine the
    meaning of SUB pay or the interpretation of I.R.C. § 3402(o). Nor did we examine those
    issues in Gerbec, 
    164 F.3d at 1026
    , where we held that certain awards representing lost
    back pay and future wages amounted to compensation paid to the employee because of
    the employer-employee relationship and thus were taxable under FICA. We have also
    considered our prior holding that payments employees received from the residual
    balance of a terminated supplemental employment benefit trust fund constituted “wages”
    for the purpose of the FICA tax because they were solely derived from employer
    contributions and were contingent on past or present employment. Sheet Metal Workers
    4
    Other subsections of the statute allow federal withholding with respect to certain payments made
    to employees for annuities and sick pay. I.R.C. § 3402(o)(1)(B) & (C). The government argues it was
    unnecessary for Congress to exclude annuity payments and sick pay from the FICA definition of “wages”
    if, under I.R.C. § 3402(o), those payments were already considered non-wage payments for FICA
    purposes.
    The bankruptcy court responded to this argument by noting that “the reason for these exclusions
    is explained by the disparate nature of the types of payments.” In re Quality Stores, Inc., 
    383 B.R. at 76
    .
    For instance, annuity payments are considered “remuneration for services” and thus are deemed to be
    “wages” for both FICA and federal income tax withholding, but Congress specifically excluded annuity
    payments from the definition of “wages” under chapters 21 (FICA) and 24 (federal income tax) of the Tax
    Code. See I.R.C. §§ 3121(a)(5)(B), 3401(a)(12)(B). By enacting § 3402(o), the court reasoned, Congress
    gave employees the option to request federal income tax withholding on annuity payments to avoid an
    unexpectedly large income tax bill. By contrast, SUB payments are not “remuneration for services,” so
    such payments do not initially fall within the statutory definition of “wages.” Therefore, there was no need
    for Congress to specifically exclude them from FICA tax, yet federal income taxpayers were provided the
    same option for federal income tax withholding. In re Quality Stores, Inc., 
    383 B.R. at 76
    . The same
    analysis applies to sick pay. 
    Id.
    In light of Coffy and our entire analysis, we adopt the bankruptcy court’s reasoning on this point.
    No. 10-1563        United States v. Quality Stores, et al.                        Page 16
    Local 141 Supplemental Unemployment Benefit Trust Fund v. United States, 
    64 F.3d 245
    , 250–51 (6th Cir. 1995). In that case, the fund did not argue that the residual
    balance payments “were supplemental unemployment benefits which are exempt from
    FICA” tax. 
    Id.
     at 251 n.4. Therefore, these prior cases do not impact our analysis here.
    E. IRS Revenue Rulings Conflict With Congressional Intent
    Having detailed the reasons why we affirm the bankruptcy court, we also explain
    why we do not adopt the government’s other arguments or follow the IRS revenue
    rulings the government cites. In many respects, we find the arguments and revenue
    rulings to be inconsistent with the intent of Congress as expressed in the statutes and the
    legislative history as discussed above.
    The government argues that, prior to 1950 when SUB pay had not yet been
    conceived, “dismissal pay” was specifically excluded from the definition of “wages”
    under FICA, Social Security Act Amendments of 1939, Pub. L. No. 76-379, ch. 666, 
    53 Stat. 1360
    , 1384, codified at I.R.C. § 1426(a)(4) (1939 Code), and Congress repealed the
    exclusion for “dismissal pay” in the Social Security Act Amendments of 1949, thus
    making all “dismissal pay” subject to FICA tax, see Pub. L. No. 81-734, ch. 809, 
    64 Stat. 477
    . The Federal Circuit adopted the government’s position, see CSX Corp., 
    518 F.3d at 1334
    , but we do not agree with the government’s historical assessment of the law.
    Prior to 1950, most “dismissal pay” was not excluded from the FICA definition
    of “wages.” Only a small category—those payments an employer was not legally
    required to make—was excluded. S. Rep. No. 76-734, at 54 (1939) (accompanying H.R.
    6635, amending the Social Security Act). The Social Security Act Amendments of 1949
    eliminated the exclusion for “dismissal payments” an employer was not legally required
    to make:
    Section 1426(a) as amended by the bill contains no provision
    comparable to paragraph (4) of existing law which excludes from the
    term “wages” dismissal payments which the employer is not legally
    required to make. Therefore, a dismissal payment, which is any payment
    made by an employer on account of involuntary separation of the
    employee from the service of the employer, will constitute wages
    No. 10-1563         United States v. Quality Stores, et al.                         Page 17
    . . . irrespective of whether the employer is, or is not, legally required to
    make such payment.
    H.R. Rep. No. 1300, at 124 (1949). In any event, we agree that at the time SUB pay was
    conceived in the 1950s, all “dismissal payments” made to employees qualified as FICA
    “wages” for purposes of taxation.
    When employers began adopting plans under collective bargaining agreements
    to fund trusts for the purpose of making SUB payments to employees in the event of
    unexpected job lay-off or termination, it was critical that SUB payments not be
    characterized as “wages.” If SUB payments constituted “wages,” then unemployed
    workers could not qualify for unemployment benefits under most states’ laws, and the
    unavailability of unemployment benefits would largely defeat the purpose of SUB
    payments. Employers thus sought the guidance of the IRS to determine whether
    payments from their SUB plans would be characterized as taxable “wages.”
    In 1956, based on the specific facts of the employer plan before it, the IRS
    determined that SUB payments did not constitute “wages” for purposes of taxation under
    FICA and the Federal Unemployment Tax Act (“FUTA”) because eight elements were
    met: (1) the benefits were paid only to unemployed former employees who were laid
    off by the employer; (2) eligibility for benefits depended on meeting prescribed
    conditions after employment terminated; (3) benefits were paid by trustees of
    independent trusts; (4) the amount of weekly benefits payable was based on state
    unemployment benefits, other compensation allowed under state unemployment laws,
    and the amount of straight-time weekly pay after withholding all taxes and contributions;
    (5) the duration of the benefits was affected by the fund level and the employee’s
    seniority; (6) the right to benefits did not accrue until a prescribed period after
    termination of employment; (7) the benefits were not attributable to the rendering of any
    particular services; and (8) no employee had any right, title, or interest in the fund until
    such employee was qualified and eligible to receive benefits. Rev. Rul. 56-249, 1956-
    1 C.B. 488
    . The IRS ruled, however, that even SUB payments meeting this definition
    No. 10-1563            United States v. Quality Stores, et al.                                    Page 18
    must still be included in the gross income of the recipient for federal income tax
    purposes.5 
    Id.
    The IRS subsequently considered a SUB plan that was unilaterally instituted by
    the employer without union negotiation, Rev. Rul. 58-128, 1958-
    1 C.B. 89
    , and a SUB
    plan that allowed the employer to pay benefits to employees directly without use of a
    separate trust, Rev. Rul. 60-330, 1960-
    2 C.B. 46
    . In both situations, the IRS ruled that
    the SUB payments were excluded from FICA “wages” because the plans were otherwise
    similar in all material respects to the plan evaluated in Rev. Rul. 56-249. The IRS also
    ruled that the same principles applied if lump sum payments were made, rather than
    payments over a period of time. Rev. Rul. 59-227, 1959-
    2 C.B. 13
    .
    In 1960, Congress amended the Internal Revenue Code to provide an income-tax
    exemption for SUB trusts. Pub. L. No. 86-667, 
    74 Stat. 534
     (1960). In doing so,
    Congress defined SUB pay as “benefits which are paid to an employee because of his
    involuntary separation from the employment of the employer (whether or not such
    separation is temporary) resulting directly from a reduction in force, the discontinuance
    of a plant or operation, or other similar conditions . . . .” 
    74 Stat. 535
    . This definition
    remains in the statute today, I.R.C. § 501(c)(17), and it closely mirrors the SUB pay
    definition Congress later added to the federal income tax withholding statute in 1969,
    as discussed earlier in this opinion. I.R.C. § 3402(o)(2)(A). Because Congress knew
    that employers had developed a variety of SUB plans, it wished to facilitate the tax-
    exempt status of SUB plans because they provide “worthwhile benefits, but at the same
    time are not in competition with profitmaking enterprises.” S. Rep. No. 86-1518 (1960),
    reprinted in 1960 U.S.C.C.A.N. 3203, 3205.
    In 1971, after Congress added its own definitions of SUB pay to § 501(c)(17) and
    § 3402(o)(2)(A), the IRS issued another revenue ruling in which it considered an
    agreement between an employer and a union under which the employer made awards to
    employees who were separated from service based on the employees’ rate of pay and
    5
    There are substantial differences in the IRS eight-part test and the five-part test Congress later
    adopted, as discussed previously in this opinion.
    No. 10-1563           United States v. Quality Stores, et al.                                 Page 19
    years of service. Relying on the “dismissal payment” amendment to the Social Security
    Act that took effect in 1950 and the “dismissal payment” regulation in the federal
    income tax withholding regulations, 
    Treas. Reg. § 31.3401
    (a)-1(b)(4), the IRS
    determined that the “dismissal payments” constituted taxable “wages” under FICA.6
    Rev. Rul. 71-408, 1971-
    2 C.B. 340
    . Soon thereafter, the IRS reached the same
    conclusion in addressing a “dismissal payment” where the employer and the employee
    had contractually agreed that the employer would make “dismissal payments” if the
    employer terminated the employee early. Rev. Rul. 74-252, 1974-
    1 C.B. 287
    .
    In 1977, the IRS determined that a SUB plan, although not directly tied to the
    receipt of state unemployment compensation benefits, was substantially the same as the
    plan discussed in Rev. Rul. 56-249. Rev. Rul. 77-347, 1977-
    2 C.B. 362
    . Because the
    payments made under that plan did not disqualify the employees from receiving state
    unemployment benefits, the IRS found that the payments were SUB payments as defined
    by Congress in § 3402(o) and were not subject to FICA tax. The IRS modified and
    amplified Rev. Rul. 56-249 and Rev. Rul. 58-128 to reflect the change in the Tax Code
    that Congress effectuated in 1969 when it enacted § 3402(o). Thus, Rev. Rul. 77-347
    is consistent with both our conclusion and that of the bankruptcy court that because SUB
    payments are not “wages” and are only treated as if they were “wages” under § 3402(o),
    SUB payments also are not “wages” under FICA.
    The IRS later reversed itself on this point, however, stating that the “definition
    of SUB pay under section 3402(o) is not applicable for FICA . . . . SUB pay is defined
    solely through a series of administrative pronouncements published by the Service.”
    Rev. Rul. 90-72, 1990-
    2 C.B. 211
    . To be exempt from “wages” under FICA, the IRS
    reasoned, SUB payments must be made to involuntarily separated employees pursuant
    to a plan that is designed to supplement the receipt of state unemployment compensation.
    
    Id.
     Moreover, the IRS ruled that payments in a lump sum are not considered linked to
    6
    Treasury Regulation § 31.3401(a)-1(b)(4) provides that “dismissal payments” are “[a]ny
    payments made by an employer to an employee on account of dismissal, that is, involuntary separation
    from the service of the employer, [which] constitute wages regardless of whether the employer is legally
    bound by contract, statute, or otherwise to make such payments.”
    No. 10-1563        United States v. Quality Stores, et al.                        Page 20
    state unemployment compensation and therefore are not excludable from FICA “wages.”
    Id. The IRS specified that it issued the ruling to “restore[] the distinction between SUB
    pay and dismissal pay by re-establishing the link between SUB pay and state
    unemployment compensation set forth in Rev. Rul. 56-249.” Id.
    In CSX Corp., 
    518 F.3d at 1346
    , the Federal Circuit adopted the IRS’s eight-part
    administrative definition of SUB pay set out in Rev. Rul. No. 56-249 and Rev. Rul. 90-
    72 rather than the express statutory definition provided by Congress in § 3402(o). That
    court characterized the payments before it as “dismissal pay” subject to FICA tax. Id.
    By contrast, we resolve the tension between the statutory enactments and the IRS
    revenue rulings in favor of the expressed will of the legislature. Applying the five-part
    definition that Congress enacted in § 3402(o)(2)(A), the payments made by Quality
    Stores to its former employees qualify as SUB payments, not “dismissal pay.” And as
    we have explained, SUB payments are not subject to FICA tax.
    We decline to imbue the IRS revenue rulings and private letter rulings with
    greater significance than the congressional intent expressed in the applicable statutes and
    legislative histories. Congress, not the IRS, prescribes the tax laws; IRS revenue rulings
    “have only such force as Congress chooses to give them, and Congress has not given
    them the force of law.” Dixon v. United States, 
    381 U.S. 68
    , 73 (1965); Aeroquip-
    Vickers, Inc. v. Comm’r of Internal Revenue, 
    347 F.3d 173
    , 181 (6th Cir. 2003)
    (observing we do not give Chevron deference to revenue rulings because “the IRS does
    not invoke its authority to make rules with the force of law”). The power of the IRS to
    “administer a federal statute and to prescribe rules and regulations to that end is not the
    power to make law . . . but the power to adopt regulations to carry into effect the will of
    Congress as expressed by the statute.” Dixon, 
    381 U.S. at 74
    . The rights of the taxpayer
    are defined by the statute, which establishes the standard by which such rights must be
    measured. 
    Id.
     And where a promulgated Treasury regulation has no power to alter a
    statute Congress enacted, neither does a revenue ruling. See 
    id. at 75
    . In appropriate
    circumstances we may give substantial judicial deference to longstanding and reasonable
    interpretations of IRS regulations and revenue rulings, Envtl. Def., 
    549 U.S. at 575
    , but
    No. 10-1563        United States v. Quality Stores, et al.                    Page 21
    in this case we conclude, for all the reasons we have discussed, that the IRS has not
    taken congressional intent fully into account.
    IV. CONCLUSION
    We agree with the Federal Circuit on one final important point: “We
    acknowledge that this issue of statutory construction is complex and that the correct
    resolution of the issue is far from obvious.” CSX Corp., 
    518 F.3d at 1340
    . While the
    Supreme Court may ultimately provide us with the correct resolution of these difficult
    issues under the law as it currently stands, only Congress can clarify the statutes
    concerning the imposition of FICA tax on SUB payments. Our role is to interpret the
    statutory law as it presently exists, and we have done that today. Accordingly, the
    judgment of the district court is AFFIRMED.
    

Document Info

Docket Number: 10-1563

Citation Numbers: 693 F.3d 605, 2012 WL 3871364

Judges: Boggs, Stranch, Carr

Filed Date: 9/7/2012

Precedential Status: Precedential

Modified Date: 10/19/2024

Authorities (22)

St. Luke's Hospital Association of Cleveland, Ohio, of the ... , 333 F.2d 157 ( 1964 )

Fairport, Painesville & Eastern Railroad v. Meredith , 54 S. Ct. 826 ( 1934 )

United States v. Quality Stores, Inc. (In Re Quality Stores,... , 105 A.F.T.R.2d (RIA) 1110 ( 2010 )

Quality Stores, Inc. v. United States (In Re Quality Stores ... , 383 B.R. 67 ( 2008 )

Sta of Baltimore-Ila Container Royalty Fund v. United States , 804 F.2d 296 ( 1986 )

Accardi v. Pennsylvania Railroad , 86 S. Ct. 768 ( 1966 )

Sheet Metal Workers Local 141 Supplemental Unemployment ... , 64 F.3d 245 ( 1995 )

Social Security Board v. Nierotko , 66 S. Ct. 637 ( 1946 )

russell-l-anderson-joseph-j-beer-gerald-l-begeman-kathryn-g , 929 F.2d 648 ( 1991 )

robert-e-gerbec-and-elizabeth-w-gerbec-97-32243269-raymond-e-morgan , 164 F.3d 1015 ( 1999 )

in-re-william-dunlap-cannon-iii-debtor-george-w-stevenson-trustee-for , 277 F.3d 838 ( 2002 )

Maguire v. Commissioner , 61 S. Ct. 789 ( 1941 )

Chevron U. S. A. Inc. v. Natural Resources Defense Council, ... , 104 S. Ct. 2778 ( 1984 )

Sta of Baltimore — ILA Container Royalty Fund v. United ... , 621 F. Supp. 1567 ( 1985 )

CSX Corp. v. United States , 518 F.3d 1328 ( 2008 )

New England Baptist Hospital v. United States , 807 F.2d 280 ( 1986 )

Canisius College v. United States , 799 F.2d 18 ( 1986 )

United States v. Detroit Medical Center , 557 F.3d 412 ( 2009 )

Dixon v. United States , 85 S. Ct. 1301 ( 1965 )

Environmental Defense v. Duke Energy Corporation , 127 S. Ct. 1423 ( 2007 )

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