EXECUTIVE SUMMARY

The decision by the Sixth Circuit Court of Appeals in Quality Stores, Inc., et al., 110 AFTR 2d 2012-5827 (6th Cir., 2012), has opened the door to file a claim for refund for employers who have paid and withheld FICA taxes on "supplemental unemployment compensation benefits" ("SUB") which are a type of severance payments made as a result of an employee's involuntary separation. An employer can file a claim for refund on Form 941-X of all FICA taxes paid relating to SUB payments for years still open under the statute of limitations. The statute of limitations for a Form 941 expires on April 15 after the third calendar year. So for FICA taxes paid in 2009, the refund claims for each quarter in 2009 must be filed on a separate Form 941-X by April 15, 2013.

THE QUALITY STORES CASE

During 2001, Quality Stores closed its business operations and terminated all of its employees. To assist its employees with the sudden termination of their employment, Quality Stores made severance payments to all of its terminated employees. The severance payments were neither tied to the employee's receipt of state unemployment compensation nor attributable to any particular services rendered by the former employees. Quality Stores timely filed Claims for refund of FICA taxes for both the employer share and the employee share for those employees who gave Quality Stores consent to pursue their claims.

In September of 2012, the U.S. Court of Appeals for the Sixth Circuit held that the SUB payments made by Quality Stores were NOT "wages" for FICA purposes and that Quality Stores was entitled to the refund of its share of FICA taxes mistakenly paid on the SUB payments. In arriving at this decision, the Court recognized that the only tests for whether SUB payments were "wages" for FICA purposes are the definitional requirements found in both the Internal Revenue Code and the Treasury Regulations. This SUB payment definition has five parts: 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.

WHAT'S NEXT?

On January 4 of this year, the U.S. Court of Appeals for the Sixth Circuit denied the request of the IRS for rehearing of the Quality Stores decision. So the IRS now has until April 4 within which to take this case to the Supreme Court which would not be heard until October. If the IRS does not appeal, employers in the Sixth Circuit would be able to cease withholding and payment of FICA taxes on any subsequent SUB payments while employers in other circuits would have the opportunity to challenge.

WHAT SHOULD EMPLOYERS WHO HAVE WITHHELD FICA TAXES ON SUB PAYMENTS DO NOW?

First, the employer should quantify as soon as possible the amount of the potential refund for years 2009 through 2012. The refund claim for 2009 must be filed by April 15, 2013 to preserve the right to seek a refund for the 2009 year. However, employers will have additional time within which to file claims for 2010 through 2012. Prior to April 15, 2014, the final date for filing a 2010 claim, employers should know the Supreme Court's action on Appeal. Next, the employer should determine if the amount of the refund claim is significant enough to justify the cost of filing the claim and the possibility that the mere filing of the claim might bring unwelcome IRS scrutiny on all of the employer's payroll withholding practices. For example, if total severance payments for 2009 total $100,000, then the maximum potential employer refund for 2009 would be $7,650. If justified, then the refund claim should be filed with the IRS by April 15, 2013.

An employer in the Sixth Circuit (taxpayers located in Kentucky, Michigan, Ohio, and Tennessee), which files a claim for refund should be aware that if the IRS requests the U.S. Supreme Court to review this case, the employer's claim will be held in suspense until the Supreme Court either declines to review or issues a final ruling in the case. If the employer is not in the Sixth Circuit, then, unless the U.S. Supreme Court has affirmed the decision of the Sixth Circuit in Quality Stores before the refund claim is filed, the IRS has stated that it will most likely deny your refund claim. If the IRS denies a taxpayer's claim for refund, the taxpayer will have 2 years to appeal such denial by filing its own law suit in Federal court.

Employers should consider if these FICA refund claims could have merit for them. The IRS has indicated that it has already suspended action on administrative refund claims totaling $127 million from approximately 800 taxpayers located in the Sixth Circuit. And the IRS has estimated that the total amount of refund claims at issue could be more than $1 billion.

Back in July 2009, Michigan State Housing Development Authority (MSHDA) announced the reactivation of the mortgage credit certificate (MCC) program. Many people are unfamiliar with the program because of the hype that surrounded a bigger and better tax incentive at the time, when President Obama announced plans to extend the first-time home buyer credit. The MCC program, which reduces the amount of federal income tax a homebuyer pays, is still active for many first time home owners and applies to states other than Michigan.

The calculation of the mortgage interest credit depends on how much interest you pay on your mortgage loan, however, the amount of the credit cannot be more than your annual federal income tax liability after all other credits and deductions have been taken into account. The unused portion of the credit can be carried forward to the next three years, or until used, whichever comes first. Here's an example scenario:

Total mortgage amount x loan interest rate = annual interest

Annual interest x MCC rate (20%) = tax credit for the year

For a mortgage of $150,000 at 4.75% interest, the annual tax credit would be:

$150,000 x 4.75% = $7,125

$7,125 x 20% = $1,425 annual tax credit

Household income, sales price, location, and lender determine whether or not a homebuyer qualifies for the program. To apply for a MCC, contact a participating mortgage lender (which vary by state and require a little more research on your part). This must be done at the same time a mortgage loan application is made. Once you've been issued a certificate, you can claim your credit by completing IRS Form 8396.

If you buy a home using a MCC and sell it within 9 years, you may have to recapture (repay) some of the credit.