As the upcoming Supreme Court session is poised to start this month many are watching the calendar to see when important cases will be heard. One highly influential tax case was recently put on the calendar, in which a now-defunct retailer is seeking a tax refund from the Internal Revenue Service for taxes paid under the Federal Insurance Contributions Act (FICA). FICA taxes are taken out of wages paid to employees and are used to fund Social Security and Medicare. In this case the employer is arguing that severance payments are not "wages" under the meaning of the law and that they are therefore entitled to a refund for the taxes already paid.

If the retailer is successful in this argument, it could mean a big change in the interpretation of the tax law and could cause the IRS to have to issue millions of dollars in refunds to other corporations who paid tax on severance pay during the recession when layoffs were at a high and many companies offered severance packages.

Previous decisions on this issue have been split, with an appeals court decision last year saying that both the retailer and its employees were entitled to a refund of the FICA taxes they paid on severance payments. However, an opinion from 2008 on a different case went the other way, saying that the employer was liable for FICA taxes. 

There are approximately 2,400 other refund claims on the same issue that are currently pending, according to government sources. 

Source: Reuters, "Supreme Court to weigh taxability of severence pay," Lawrence Hurley and Patrick Temple-West, Oct. 1, 2013.