Overview

The Court of Federal Claims, in a series of decisions, previously held that certain of the payments at issue were subject to tax, and that others were not subject to tax. On appeal, the Federal Circuit affirmed in part and reversed in part the decisions of the Court of Federal Claims, and remanded for additional proceedings.

On appeal to the Federal Circuit, the taxpayer made several alternative arguments that the payments made to various group of employees under the reduction-in-force were not wages. The Federal Circuit, however, reverse the lower court’s holding that payments falling within the definition of supplemental unemployment benefits under section 3402(o) are non-wages. The appeals court instead held that the payments made in connection with the reduction-in-force were all “wages” or “compensation” as those terms are used in FICA and the RRTA.

The Federal Circuit also held that (1) the employees who were placed in layoff status received benefits that represented a fixed percentage of their average monthly compensation; (2) the duration of the payments was governed by each employee’s length of service with the employer; and (3) as such, the payments were similar to those considered in Abrahamsen v. United States, 228 F.3d 1360 (Fed. Cir. 2000), which were held to be wages. Accordingly, the Federal Circuit reversed the lower court’s finding that those payments were not wages because they qualified as “supplemental unemployment compensation benefits” (SUB) payments under section 3402(o).

Turning to the question of separation payments made to non-management employees—both those on lay-off status or otherwise and who chose to sever their relationship with the taxpayer—the Federal Circuit concluded such amounts constituted wages because those payments were dismissal or severance payments of the sort that have consistently been treated as wages for FICA purposes. The Federal Circuit affirmed the part of the decision of the Court of Federal Claims that found such separation payments were wages and reversed the part of the decision concerning payments that the lower court held were not wages.

With respect to payments to management employees who were separated from employment, either voluntarily or involuntarily, the Federal Circuit concluded these amounts were also wages. The appeals court found that these payments constituted dismissal or severance payments and were closely analogous in character to the dismissal payments that were held to be wages in Abrahamsen. Because the Court of Federal Claims held that some of the payments in this group constituted wages and some did not, the appeals court affirmed the trial court’s judgment in part and reversed in part.

The Federal Circuit addressed payments made to employees whose full-time positions were eliminated but who continued to be employed by the company, and concluded these payments were wages and were subject to employment taxation. The lower court’s decision as to these payments was therefore affirmed.