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U.S. justices to hear case on whether severance can be taxed

By Lawrence Hurley

WASHINGTON (Reuters) - The Supreme Court agreed on Tuesday to consider whether severance pay in an involuntary layoff can be subject to federal payroll taxes in a case the Obama administration says could affect $1 billion in refund claims.

The administration asked the justices to hear the case after losing a dispute with agricultural retailer Quality Stores Inc. The company wanted a tax refund for just over $1 million in payroll taxes it paid when laying off workers.

The company sought the refund after entering bankruptcy in 2001. During that period it closed all of its almost 300 stores.

The legal question is whether the company was required to pay the taxes under the Federal Insurance Contributions Act, which helps finance federal retirement and healthcare benefits.

Both a federal judge and an appeals court said the company was not required to pay the taxes because it was ceasing operations. Therefore the payments were categorized as supplemental unemployment benefits, which are not taxable.

The appeals court, the 6th U.S. Circuit Court of Appeals, ruled that both Quality Stores Inc and former employees who took part in the suit could claim a refund.

The Obama administration said in court papers that there are more than 2,400 administrative refund claims currently pending that raise the same issue.

Justice Elena Kagan will not participate in the case, most likely because she may have had some involvement in the litigation when she served as solicitor general in the Obama administration.

Oral arguments and a decision are due in the court's coming term, which starts on October 7 and ends in June.

The case is United States v. Quality Stores Inc.

(Reporting by Lawrence Hurley; Editing by Howard Goller and Alden Bentley)

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