FICA Holdings Overturned

June 1, 2008

The U.S. Court of Appeals for the Federal Circuit recently reviewed three prior decisions of the U.S. Court of Federal Claims involving railroad operator CSX Corp. and whether certain payments to laid-off employees were wages for purposes of FICA (for the lower court’s main ruling, see “Tax Matters: When Are Wages Not FICA Wages?JofA, Dec. 06, page 80). The circuit court held that all pay ments made by CSX were subject to the FICA tax and rejected the lower court holding that some of the payments were supplemental unemployment compensation benefits not subject to FICA. The case is CSX v. U.S., 101 AFTR2d 2008-1120.


In an unrelated development, the IRS provided a safe harbor method for accounting by accrual-method taxpayers for FICA and FUTA tax liabilities incurred by compensation earned at year end and paid in the new year. The recurring-item exception of Treas. Reg. § 1.461- 5(b)(1)(i) will be available to taxpayers under the all-events test, the Service said in Revenue Procedure 2008-25. The method is included as an automatic consent to change of accounting provided under Revenue Procedure 2002-9. Citing Eastman Kodak Co. v. U.S. (37 AFTR2d 76-1200), the Service and Treasury noted that taxpayers may not know at the end of a taxable year whether an employee has reached any applicable payroll tax ceiling by the time the tax is paid, raising a question as to when the corresponding liability is fixed. The method is effective for taxable years ending on or after Dec. 31, 2007.

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