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(Washington Post)   In a case that inexplicably reached the high court, the Justices unanimously rule that severance payments are in fact considered to be taxable wages, but refrain from issuing a one-word opinion of "duh"   (washingtonpost.com) divider line 39
    More: Interesting, severance payment, taxable wages, justices  
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1619 clicks; posted to Business » on 01 Apr 2014 at 3:59 PM (52 weeks ago)   |  Favorite    |   share:  Share on Twitter share via Email Share on Facebook   more»



39 Comments   (+0 »)
   
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2014-04-01 04:05:01 PM  
Justice Department lawyers argued that the government could face more than $1 billion in tax refund claims from other employers if the lower court decision was upheld.

...and a whole lot more than that once employers started giving their employees weekly severance packages instead of paychecks.
 
2014-04-01 04:21:14 PM  
IRS flow chart.
Was it earned?   Tax it.
Was it gifted?      Tax it
Was it found?      Tax it.
Did it come to them in a dream then they lost it?   Tax it.

Is the filing party not a billionaire?  Tax them to death.
 
2014-04-01 04:23:31 PM  

thurstonxhowell: Justice Department lawyers argued that the government could face more than $1 billion in tax refund claims from other employers if the lower court decision was upheld.

...and a whole lot more than that once employers started giving their employees weekly severance packages instead of paychecks.


So their primary argument was "we should prevail because it would cost us a lot of money if don't"?
 
2014-04-01 04:31:39 PM  

bighairyguy: thurstonxhowell: Justice Department lawyers argued that the government could face more than $1 billion in tax refund claims from other employers if the lower court decision was upheld.

...and a whole lot more than that once employers started giving their employees weekly severance packages instead of paychecks.

So their primary argument was "we should prevail because it would cost us a lot of money if don't"?


I think their primary argument was:

How the f*ck could it possibly not be?
 
2014-04-01 04:45:48 PM  
The employer actually had a non-frivolous argument here. The question is whether the severance payments were subject to withholding under FICA. The income tax withholding definition of "wages" (IRC section 3401) clearly refers to severance and the FICA definition (section 3121) does not. Based on that, the taxpayer argued that severance was not included in the latter definition. But the court held that the generally understood meaning of the term "wages" would encompass severance and the statutory list of inclusions need not be all-encompassing.
 
2014-04-01 04:47:00 PM  

The Muthaship: How the f*ck could it possibly not be?


Because sometimes, the law doesn't care what something looks, sounds, smells, tastes, or feels like, only what it's called on official paperwork.

Thus, the act of buying and selling insurance is not "commerce" simply because McCarran-Ferguson says it's not, even though the non-act of not buying any other product or service somehow does constitute commerce.

// I'm sure there are other examples as well
// IANAL
 
2014-04-01 04:47:51 PM  
The scary part is that the Supreme Court had to reverse a lower court decision:

The decision reverses rulings by the 6th U.S. Circuit Court of Appeals and a federal district court, which found the payments were not considered taxable wages.
 
2014-04-01 05:02:34 PM  

Super Chronic: But the court held that the generally understood meaning of the term "wages" would encompass severance and the statutory list of inclusions need not be all-encompassing.


ObTrivia: this is tangentially related to the original meaning of the expression  "the exception proves the rule". In the case of a statutory list of exclusions, it is generally held that even when a statute is a sloppily worded, if there is one or more specifically named exception, the implication is that the rule applies to any other case.
 
2014-04-01 05:06:41 PM  
I guess I'd never really thought about it. Yes, the company gives it to you but not as compensation for hours worked, so what is it? Often if you're being laid off they'll make you sign something saying you won't sue if you take the severance money (is that enforceable?) so it's hush money? Is it a benefit? A bonus? It's income in any case so I expect to pay taxes on it and have the usual deductions taken but you could make an argument that it's not specifically "wages." So I'm not sure it's such a "duh" thing.

/also not a lawyer
 
2014-04-01 05:07:51 PM  

Dr Dreidel: The Muthaship: How the f*ck could it possibly not be?

Because sometimes, the law doesn't care what something looks, sounds, smells, tastes, or feels like, only what it's called on official paperwork.


In the case of tax law, it's generally the other way around. The IRS (and in the UK, Inland Revenue) reserve the right to treat something as what it actually appears to be rather than what you try to call it. Otherwise, companies would give their CEOs regular non-taxable "gifts" rather than a salary. Similarly, you can call yourself a "contractor", but if you work exclusively for the same company for ten years, the IRS is going to treat you like an employee, and the company like an employer.

My guess as to how this got this far: top execs tend to get very large severance packages when they fly their companies into the ground, and one or more of them managed to persuade -- somehow -- a lower court that their payoff should be free and clear.
 
2014-04-01 05:10:57 PM  

vudukungfu: IRS flow chart.
Was it earned?   Tax it.
Was it gifted?      Tax it
Was it found?      Tax it.
Did it come to them in a dream then they lost it?   Tax it.

Is the filing party not a billionaire?  Tax them to death.


In this case it is (A).  Severance payments are obviously wages.  If my non-severance wages are taxed, then severance wages better be taxed.

/No you don't have to declare your grandmother's $20 Christmas check.  It takes a really substantial gift to get hit with a tax.
 
2014-04-01 05:13:24 PM  
I'm not sure if everyone is clear on this, because TFA and the headline might be a tad misleading: nobody is questioning whether these payments are income to the employees.
 
2014-04-01 05:14:05 PM  

AliceBToklasLives: /No you don't have to declare your grandmother's $20 Christmas check.  It takes a really substantial gift to get hit with a tax.


And if the gift is that substantial, it's on Grandma. It's still not income.
 
2014-04-01 05:14:22 PM  
DVDA:
Another fun point of law is whether severance payments count against unemployment and what date range does it cover.
 
2014-04-01 05:16:41 PM  

Satanic_Hamster: DVDA:


Another phliter?

Test: DNRTFA
 
2014-04-01 05:18:05 PM  

czetie: Similarly, you can call yourself a "contractor", but if you work exclusively for the same company for ten years, the IRS is going to treat you like an employee, and the company like an employer.


Has this actually happened? (Not that I have reason to distrust, I've just never heard of such a thing.)

Another example I can think of is stock traders, who claimed their wages were "capital gains", and got to pay taxes at the flat 15%, rather than at the marginal rates we all know and love. Has this abuse of the system been curbed? (The money they were paid with might have been some other entity's gains from investments, but it certainly was not the trader's investment.)
 
2014-04-01 05:33:43 PM  

Dr Dreidel: czetie: Similarly, you can call yourself a "contractor", but if you work exclusively for the same company for ten years, the IRS is going to treat you like an employee, and the company like an employer.

Has this actually happened? (Not that I have reason to distrust, I've just never heard of such a thing.)


Fair question, it does sound very much like the kind of assertion that could easily be an urban legend without a real basis. But in this case, yes. In one high profile case in 1989, Microsoft got nailed and HP has been accused of it too back in the mid-1980s but I don't recall how that one finished. And here is a good summary article of other notable cases. It was a lot more prevalent in the 1980s, before the IRS and the states cracked down, so depending on how old you are you could easily have not heard about those cases.

The IRS tends to care a lot about this practice because, among other things, the company is avoiding paying payroll tax.


Another example I can think of is stock traders, who claimed their wages were "capital gains", and got to pay taxes at the flat 15%, rather than at the marginal rates we all know and love. Has this abuse of the system been curbed?

I'm just going to point out that stock traders and hedge fund managers have lots of money and contribute generously to both major parties, and allow you to draw your own conclusion....
 
2014-04-01 05:39:26 PM  

Needlessly Complicated: Often if you're being laid off they'll make you sign something saying you won't sue if you take the severance money (is that enforceable?)


DVDA: When I left Oracle by my own choice, about a week after I received my final check, which included paying off unused vacation (this being California, I believe they were obliged), I received a nice letter from them asking me to sign a document that promised not to ever sue Oracle even over information not currently known to me that might be revealed in the future. I emailed HR saying I was perfectly happy to agree to the bits that basically just reconfirmed my confidentiality agreement, that I had returned all Oracle property, etc., but why would I waive my right to sue when I had no idea what they might be hiding?

Strangely, I never heard back from them.
 
2014-04-01 05:48:51 PM  

czetie: Fair question, it does sound very much like the kind of assertion that could easily be an urban legend without a real basis. But in this case, yes.


Sweet. I like it when the IRS actually does good things. (And I'm 32 - young enough that I would have missed big developments in payroll law in the 80s, but old enough that I feel I should have picked this up at some point.)

czetie: I'm just going to point out that stock traders and hedge fund managers have lots of money and contribute generously to both major parties, and allow you to draw your own conclusion....


Obviously. Side question: who would have standing to sue over this - only the IRS? I know there was talk of changing this practice via Congressional action, but it was quickly killed when someone realized who signs the checks.

I want to know if the courts could look (have looked?) at this, perhaps when prodded by a concerned citizen.
 
ZAZ [TotalFark]
2014-04-01 05:54:23 PM  
czetie

This wasn't for the direct benefit of rich people. The company wanted a refund of the employer's share of FICA contributions. That added up to $1 million.
 
2014-04-01 06:02:29 PM  

Dr Dreidel: Side question: who would have standing to sue over this - only the IRS? I know there was talk of changing this practice via Congressional action, but it was quickly killed when someone realized who signs the checks.


IANAL but I suspect your supposition is correct -- if the IRS (or possibly a state employment agency?) doesn't pursue it, it would be hard to see how any private citizen would have standing.
 
2014-04-01 06:27:57 PM  

czetie: Dr Dreidel: Side question: who would have standing to sue over this - only the IRS? I know there was talk of changing this practice via Congressional action, but it was quickly killed when someone realized who signs the checks.

IANAL but I suspect your supposition is correct -- if the IRS (or possibly a state employment agency?) doesn't pursue it, it would be hard to see how any private citizen would have standing.


For federal tax this is correct. There is such a thing as a qui tam action in which a private citizen asserts a claim that the government is being ripped off; on the federal side this is governed by the False Claims Act, which expressly does not allow tax collection cases. However, some states allow it.
 
2014-04-01 06:31:55 PM  
Considering a big chunk of my severance went to State and Federal taxes, my former company sure as hell better be paying all other related taxes on it as well.
 
2014-04-01 06:55:36 PM  
 IRS flow chrt.
Ws it erned?   Tx it.
Ws it gifted?      Tx it
Ws it found?      Tx it.
Did it come to them in drem then they lost it?   Tx it.

Is the filing prty not billionire?  Tx them to deth.


Did you buy bitcoins t $1.00?  Then tody, you bought n ice crem cone for 1 BC; then plese fill out your 1040 Schedule D nd show cpitl gins on the brter exchnge!
 
2014-04-01 07:22:49 PM  

Dr Dreidel: czetie: Fair question, it does sound very much like the kind of assertion that could easily be an urban legend without a real basis. But in this case, yes.

Sweet. I like it when the IRS actually does good things. (And I'm 32 - young enough that I would have missed big developments in payroll law in the 80s, but old enough that I feel I should have picked this up at some point.)



Depends on where you've worked. I'm 32 and have worked for a couple of larger companies, some as contract work. This was explained to me by some of the fellow workers.

IIRC, Microsoft gave these "contractors" phones, desks, name badges, etc., and they were in the building for years. They would get the free company lunches, get to partake in various programs the company offered, etc., they were just paid/billed as "contractors".

So now, companies do things like only allowing 18 month contracts, with extensions of 6 months, for any individual. They won't let you have a free lunch if they are providing a free lunch to their employees. You usually aren't allowed to use their fitness centers, take part in various training classes, etc.
 
2014-04-01 07:25:12 PM  
Should be separate. Severance is a lump sum of some period of time of wages. It could be taxed at a different rate if received over time versus lump sum.
 
2014-04-01 07:31:04 PM  

Cubicle Jockey: Satanic_Hamster: DVDA:

Another phliter?

Test: DNRTFA


Filter is messing with my bro story, cool.
 
2014-04-01 07:41:06 PM  

AliceBToklasLives: vudukungfu: IRS flow chart.
Was it earned?   Tax it.
Was it gifted?      Tax it
Was it found?      Tax it.
Did it come to them in a dream then they lost it?   Tax it.

Is the filing party not a billionaire?  Tax them to death.

In this case it is (A).  Severance payments are obviously wages.  If my non-severance wages are taxed, then severance wages better be taxed.

/No you don't have to declare your grandmother's $20 Christmas check.  It takes a really substantial gift to get hit with a tax.


The gift donor has to pay tax for a gift over $14,000, not the receiver. Thus maintaining the concept of a gift.
 
2014-04-01 07:53:42 PM  

Dr Dreidel: even though the non-act of not buying any other product or service somehow does constitute commerce


Pretty sure the Supreme Court recently ruled 5-4 that not participating in a market isn't commerce.  I think the ruling may have even generated a fair amount of discussion.  Something to do with the ACA if I recall.  .  .
 
2014-04-01 08:25:18 PM  

kidgenius: So now, companies do things like only allowing 18 month contracts, with extensions of 6 months, for any individual. They won't let you have a free lunch if they are providing a free lunch to their employees. You usually aren't allowed to use their fitness centers, take part in various training classes, etc.


Yep. I was self-unemployed for a while in the early 1990s and did some contract work teaching classes for HP. I wasn't allowed to use the squash courts, join in the after-work soccer pick-up game, ... I was allowed to sit in on a couple of classes, but only on the "See one, teach one" principle.

I was allowed to drink the coffee, but I don't know whether that was because coffee was also provided to the attendees, or because they realized the futility of asking me to do anything intelligent without access to coffee.
 
2014-04-01 08:46:19 PM  
czetie:
Similarly, you can call yourself a "contractor", but if you work exclusively for the same company for ten years, the IRS is going to treat you like an employee, and the company like an employer.

Dr Dreidel:
Has this actually happened? (Not that I have reason to distrust, I've just never heard of such a thing.)

Yes, it definitely has, and on much shorter scales.

A number of years ago, the audio-visual industry started trying to shift from an employee/employer model to customer/contractor one - to save on taxes. After a couple of years of this, one of the "contractors" of one company got audited, and his taxes were a huge mess. So he claimed that he was actually an employee, and that they should have been deducting taxes and such.

The IRS took a look and decided that yes, indeed, he was an employee. Part of the definition of "contractor" is that you are making the actual decisions, in addition to the "do you work for anyone else?" rule. If you're just taking instructions and doing what most people at that company would consider a "regular" job, you're an employee.
 
2014-04-01 09:44:14 PM  

czetie: Dr Dreidel: The Muthaship: How the f*ck could it possibly not be?

Because sometimes, the law doesn't care what something looks, sounds, smells, tastes, or feels like, only what it's called on official paperwork.

In the case of tax law, it's generally the other way around. The IRS (and in the UK, Inland Revenue) reserve the right to treat something as what it actually appears to be rather than what you try to call it. Otherwise, companies would give their CEOs regular non-taxable "gifts" rather than a salary. Similarly, you can call yourself a "contractor", but if you work exclusively for the same company for ten years, the IRS is going to treat you like an employee, and the company like an employer.

My guess as to how this got this far: top execs tend to get very large severance packages when they fly their companies into the ground, and one or more of them managed to persuade -- somehow -- a lower court that their payoff should be free and clear.


It doesn't affect highly paid executives.  They don't pay social security tax on anything over $117k per year.  Effectively anyone making over $117,000 per year gets a 15% tax cut for all marginal dollars of income over that. So if some junior executive makes $150,000 per year then gets a $50,000 severance he/she would never pay ss tax on that anyway regardless of earnings mechanism.


http://www.ssa.gov/planners/maxtax.htm
 
2014-04-02 12:44:09 AM  

The Muthaship: bighairyguy: thurstonxhowell: Justice Department lawyers argued that the government could face more than $1 billion in tax refund claims from other employers if the lower court decision was upheld.

...and a whole lot more than that once employers started giving their employees weekly severance packages instead of paychecks.

So their primary argument was "we should prevail because it would cost us a lot of money if don't"?

I think their primary argument was:

How the f*ck could it possibly not be?


It wouldn't be that unrealistic. The question was whether FICA and Medicare apply. There are types of employment income on which they do not apply.

If the question was as the headline (both Fark and TFA) indicates, that they were arguing severance was not taxable, that would be a dumb case.
 
2014-04-02 08:45:31 AM  
Rich people don't pay taxes.   You can look it up.

Also, tea baggers and deniers.
 
2014-04-02 10:57:38 AM  

AliceBToklasLives: In this case it is (A).   Severance payments are obviously wages.  If my non-severance wages are taxed, then severance wages better be taxed.


Wages are paid in return for producing a set amount of work (either in volume of product or hours spent). Wages are what is given to reimburse someones time and/or effort. Wages are a requirement (or you would be a slave), whereas  severance is not (it may be part of anenforceable contract, but that is not obligated by law).

Severance is not being paid out in exchange for work produced (any work produced was already reimbursed as wages), and is a non-obligated gift. Not a wage.
 
2014-04-02 11:10:19 AM  
The terms of and availability of a severance package are without a doubt part of an employer's compensation of employees.  Since it is provided in cash (rather than as some harder-to-pin-down value like donuts on Wednesdays) then it's pretty easy for the IRS to identify it, and pretty damn near impossible for an employer or an employee to claim that it isn't payment in exchange for services rendered - ie. "wages".
 
2014-04-02 01:02:20 PM  

Swampmaster: IRS flow chrt.
Ws it erned?   Tx it.
Ws it gifted?      Tx it
Ws it found?      Tx it.
Did it come to them in drem then they lost it?   Tx it.

Is the filing prty not billionire?  Tx them to deth.

Did you buy bitcoins t $1.00?  Then tody, you bought n ice crem cone for 1 BC; then plese fill out your 1040 Schedule D nd show cpitl gins on the brter exchnge!


I think you dripped some ice cream on your keyboard -- specifically the "A" key.
 
2014-04-02 02:04:58 PM  

czetie: Dr Dreidel: Side question: who would have standing to sue over this - only the IRS? I know there was talk of changing this practice via Congressional action, but it was quickly killed when someone realized whocit signs the checks.

IANAL but I suspect your supposition is correct -- if the IRS (or possibly a state employment agency?) doesn't pursue it, it would be hard to see how any private citizen would have standing.


the issue is standing (whether you are a party for whom a remedy exists).

generally, taxpayer status does not grant standing.  The exception is rare (government action that affects your status as a taxpayer).
 
2014-04-02 03:21:32 PM  

LemSkroob: AliceBToklasLives: In this case it is (A).   Severance payments are obviously wages.  If my non-severance wages are taxed, then severance wages better be taxed.

Wages are paid in return for producing a set amount of work (either in volume of product or hours spent). Wages are what is given to reimburse someones time and/or effort. Wages are a requirement (or you would be a slave), whereas  severance is not (it may be part of anenforceable contract, but that is not obligated by law).

Severance is not being paid out in exchange for work produced (any work produced was already reimbursed as wages), and is a non-obligated gift. Not a wage.


First the technical definition of something for tax purposes may not be the same as the common definition.

Second the relevant sections of the IRC and regs will say more than "wages".

The whole question appears to have been "is the list in the code/regs to be considered exhaustive or not" and the Supreme Court ruled the latter.
 
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