In re Quality Stores, Inc.

• Decision Date: 03 March 2008
• Docket Number: Bankruptcy No. GG 01-10662.,Adversary No. 05-80573.
• Citation: 383 B.R. 67
• Parties: In re QUALITY STORES, INC., et al., Debtors. Quality Stores, Inc., et al., Plaintiffs, v. United States of America, Defendant.
• Court: U.S. Bankruptcy Court — Western District of Michigan

383 B.R. 67

In re QUALITY STORES, INC., et al., Debtors Quality Stores, Inc., et al., Plaintiffs, v. United States of America, Defendant.

Bankruptcy No. GG 01-10662.

Adversary No. 05-80573.

United States Bankruptcy Court, W.D. Michigan.

March 3, 2008.

Natalie Hoyer Keller, Kirkland & Ellis, LLP, Chicago, IL, for Quality Stores, Inc., et al.

Michael W. Davis, U.S. Department of Justice, Washington, D.C., for United States of America.

OPINION REGARDING SEVERANCE PAY AND FICA CONTRIBUTIONS

JAMES D. GREGG, Chief Judge.

I. INTRODUCTION

Employees of Quality Stores, Inc., et al. ("Debtors") received severance pay resulting from their involuntary termination from employment because of business cessation. The money received, without question constitutes "income" within the meaning of the Internal Revenue Code. The question is whether the receipt of the severance pay by the employees constitutes "wages" as well. "Income" and `wages" are not coterminous. Under the facts of this case, where is the legal boundary line between "income" and "wages" to be drawn?

II. ISSUE

Are the Debtors entitled to a turnover from the United States of America, Internal Revenue Service ("IRS") of payments made for Federal Insurance Contributions Act ("FICA") taxes attributable to severance payments made to the Debtors' employees?¹

III. JURISDICTION

The court has subject matter jurisdiction over this bankruptcy case and this adversary proceeding. 28 U.S.C. § 1334. The case and all related proceedings have been referred to this court for decision. 28 U.S.C. § 157(a) and L.R. 83.2(a) (W.D.Mich.). This adversary proceeding is a core proceeding. 28 U.S.C. § 157(b)(2)(E) (turnover of property of the estate).

IV. FACTS

The parties have stipulated to the relevant facts for purposes of this summary judgment motion ("Stip. Facts"). Prior to their bankruptcy cases, the Debtors operated a chain of retail stores specializing in agricultural supplies and related products. During the period preceding the bankruptcy cases (the "Prepetition Period"), the Debtors were forced to close approximately sixty-three stores and nine distribution centers. The Debtors also terminated approximately seventy-five employees at their corporate office during the Prepetition Period.

On October 20, 2001, an involuntary chapter 11 petition was filed against the Debtors. Quality Stores, Inc., answered the involuntary petition and consented to the entry of an order for relief on November 1, 2001. The remaining Debtors also commenced voluntary chapter 11 cases on November 1, 2001. After the petition date (the "Postpetition Period"), the Debtors closed their remaining 311 stores and three distribution centers. The Debtors also terminated all of their remaining employees.

The Debtors made severance payments to employees who were terminated during both the Prepetition and Postpetition Periods. The parties agree that the severance payments were made "pursuant to [severance plans] maintained by the Debtors." (Stip. Facts ¶ 15.) The parties further stipulate that the severance payments were made "because of the employees' involuntary separation from employment," which resulted "directly from a reduction in force or the discontinuance of a plant or operation." (Stip. Facts ¶ 15.) The severance payments were included in the employees' gross income, and the Debtors reported the severance payments as wages on the W-2 forms issued to employees. The Debtors withheld federal income tax and the employees' share of FICA tax from the severance payments. The Debtors also paid the employer's share of FICA tax with respect to the severance payments.

Under the Prepetition Severance Plan, the Debtors' senior executives received twelve to eighteen months of severance pay. All other employees received one week of severance pay for each full year of service. These payments were not connected to the receipt of state unemployment compensation and were not attributable to the rendering of any particular employment service. The severance payments were paid on a weekly or semiweekly basis, in accordance with the Debtors' normal payroll period. Approximately $382,362 of the total refund requested in this adversary proceeding is attributable to severance payments made under the Prepetition Severance Plan.

Under the Postpetition Severance Plan, officers received six to twelve months of severance pay. Full-time salaried and hourly employees who had been employed for at least two years received one week of severance pay for each full year of service, up to a maximum of ten weeks for salaried employees and five weeks for hourly employees. Employees who had worked for the Debtors for less than two years received one week of severance pay, and the approximately 900 employees who were subsequently employed by the companies who purchased the Debtors' assets did not receive any severance pay. Like the prepetition severance payments, the postpetition payments were not connected to the receipt of state unemployment compensation and were not attributable to the rendering of any particular employment services. All severance payments for the Postpetition Period were paid in a lump sum. Approximately $617,763 of the total refund requested in this adversary proceeding is attributable to payments made under the Postpetition Severance Plan.

On Septembers 17, 2002, the Debtors filed fifteen separate refund claims with the IRS, seeking to recover $1,000,125 in allegedly overpaid FICA taxes.² On June 1, 2005, the Debtors filed this adversary proceeding. The Debtors' complaint seeks to compel the IRS to turn over the alleged overpaid FICA taxes, plus interest, as property of the Debtors' bankruptcy estate. Because the issue presented in this adversary proceeding is a purely legal question, the parties filed stipulated facts and cross motions for summary judgment. Legal memoranda were filed, oral argument was held, and the court took the matter under advisement.

V. DISCUSSION

A. Summary Judgment Standard

Motions for summary judgment are governed by Federal Rule of Civil Procedure 56(c). FED. R. BANKR.P. 7056. Under Rule 56(c), summary judgment is appropriate "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." FED.R.CIV.P. 56(c). All material facts have been stipulated to by the parties to this adversary proceeding. The parties agree, and this court believes, that the legal issues presented are appropriate for resolution by summary judgment.

B. Did the Severance Payments to the Debtors' Employees Constitute "Wages"?

FICA taxes are imposed on employees' "wages" "to fund Social Security and Medicare Benefits." Appoloni v. United States, 450 F.3d 185, 189 (6th Cir. 2006), cert. denied, ___ U.S. ___, 127 S.Ct. 1123, 166. L.Ed.2d 891 (2007). For purposes of FICA, § 3121(a) of the Internal Revenue Code defines "wages" as "all remuneration for employment, including the cash value of all remuneration (including benefits) paid in any medium other than cash." 26 U.S.C. § 3121(a).³ The broad, inclusive nature of this definition has been recognized by both the United States Supreme Court and the Sixth Circuit Court of Appeals. See Social Sec. Bd. v. Nierotko, 327 U.S. 358, 365-66, 66 S.Ct. 637, 641, 90 L.Ed. 718 (1946); Gerbec v. United States, 164 F.3d 1015, 1026 (6th Cir.1999). A broad interpretation of this definition has also been deemed consistent with Congress's intent "to impose FICA taxes on a broad range of remuneration in order to accomplish the remedial purposes of the Social Security Act." Appoloni, 450 F.3d at 190 (citation omitted).

An employee's "wages" are also the basis for measuring an employer's obligations under the income tax withholding provisions of the Internal Revenue Code. Rowan Cos. v. United States, 452 U.S. 247, 254, 101 S.Ct. 2288, 2293, 68 L.Ed.2d 814 (1981). For income tax withholding purposes, Congress choose to define the term "wages" in "substantially the same language that it used in FICA...." Rowan, 452 U.S. at 255, 101 S.Ct. at 2293. Accordingly, the income tax withholding provisions of the Internal Revenue Code define "wages" as "all remuneration (other than fees paid to a public official) 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." 26 U.S.C. § 3401(a).

In the income tax context, § 3402(o) extends the withholding requirement to "certain payments other than wages" including (1) "any supplemental unemployment compensation benefit paid to an individual;" (2) certain annuity payments to an individual; and (3) certain payments of sick pay to an individual. 26 U.S.C. § 3402(o) (emphasis added). Section 3402(o)(1) states that each of these types of payments shall be "treated as if it were a payment of wages" for income tax withholding purposes.⁴ 26 U.S.C. § 3402(o)(1) (emphasis added). The Internal Revenue Code defines "supplemental unemployment compensation benefits" 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 employees gross, income.

26 U.S.C. § 3402(o)(2)(A). In this adversary proceeding, the Debtors and the IRS have stipulated that the severance payments made under both the Pre- and Post-petition Severance Plans meet this definition. (Stip. Facts ¶ 15.)

The Debtors assert that supplemental unemployment compensation benefits are not wages for income tax withholding purposes, but in accordance with § 3402(o), are merely treated as if th...