United States v. Quality Stores, Inc. (In Re Quality Stores, Inc.)

RECOMMENDED FOR FULL-TEXT PUBLICATION
Pursuant to Sixth Circuit Rule 206
File Name: 12a0313p.06

UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
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In re: QUALITY STORES, INC., et al.,
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Debtors.
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No. 10-1563

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UNITED STATES OF AMERICA,

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Appellant,
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v.

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QUALITY STORES, INC., et al.,
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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.*

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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

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OPINION
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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.