The U.S. Supreme Court and the U.S. Tax Court recently issued clarifications on a couple of issues many of your clients will encounter:

Severance Pay Is Subject to Employment Taxes. In U.S. v. Quality Stores, Inc., the Supreme Court confirmed that severance pay to an employee is indeed subject to FICA and FUTA taxes. Employers should withhold and report these payments appropriately. While this outcome had seemed obvious to many, the Court of Appeals for the Sixth Circuit had previously held that severance pay was not a form of “wages” for purposes of these taxes. The issue is now resolved.

Suspended Corporation Cannot File in Tax Court.  In Medical Weight Control Specialist v. Commissioner, the U.S. Tax Court confirmed that a corporation that had its corporate powers suspended under state law could not file an effective petition to challenge an IRS tax assessment. When a corporation receives a formal notice of deficiency from the IRS, it normally has only 90 days to file a petition with the Tax Court challenging the deficiency. So a corporation in suspension will have to act quickly to get its corporate powers restored if it receives a 90-day letter and wishes to get access to a Tax Court review.