FICA Tax on Severance Payments

In United States v. Quality Stores, Inc.  the United States Court of Appeals for the Sixth Circuit (Michigan, Ohio, Kentucky, Tennessee) ruled that supplemental unemployment benefit payments (severance payments) are not subject to FICA (social security and medicare) taxes.  By statute Supplemental unemployment benefit payments are not wages and are only treated as wages for federal income tax withholding only. 

While the government argued that an explicit exemption from withholding was required for income to not be subject to the FICA tax, the court disagreed.  It held that as the benefits were not wages they could not be subject to FICA withholding as there was no explicit allowance for withholding as there was for federal income taxes.  The severance payment could not be compensation for services rendered.  Instead they must be compensation for the loss of employment and must be contingent on the loss of employment whether temporary or permanent. They are still subject to federal and state income taxes.

As half of the FICA tax is paid by the employer and half by the employee both the employer and the employee stand to recover a refund.  In this case Quality Stores sought a one million dollar refund.  The government's total liability could be over four billion dollars. 

The federal circuit concluded that severance payments were subject to FICA taxes in 2008 so there is now a circuit split on this issue and the government will likely request a hearing en banc before the entire Sixth Circuit.  The case may be ripe for review by the United States Supreme Court.  Given the amount the government might have to refund if this decision stands an appeal is likely.  The government had argued that congress had "decoupled" withholding of federal income tax from withholding of FICA taxes in 1983 and that income not subject to withholding for federal income taxes was not

http://www.ca6.uscourts.gov/opinions.pdf/12a0313p-06.pdf

http://www.forbes.com/sites/ashleaebeling/2012/09/13/severance-pay-fica-tax-refunds-for-employers-and-employees-back-on-the-table/

s/ Kurt Koehler
308 1/2 S. State Street Suite 36
Ann Arbor, Michigan 48198
(Washtenaw County)

Child Support Nonpayment - Impossibility Defense

The Michigan Supreme Court issued an opinion supported by a 4 justice majority in People v. Likine on July 31, 2012 that allows a defendant to raise the common law defense of impossibility in felony non-payment of child support cases.  The court did not adopt an inability to pay defense.  Three justices dissented and would have adopted the broader inability to pay defense.   Likine combined three separate appeals of felony non-payment of child support convictions into one appeal.  In one instance the defendant had been unemployed for over three years and was on social security for mental illness.  Her child support payment was over $1,000 per month at one point.  

Felony non-payment of child support under MCL 750.165 is a strict liability offense.  The statutory maximum for a conviction of felony non-support is 4 years in prison and or a $2,000 fine.  The impossibility defense is a high standard to meet.  The defendant must make a prima facie case of impossibility or the defense will not be submitted to the jury.  This means that the defendant must establish facts at trial sufficient for a reasonable jury to find impossibility or the judge will not send the defense to the jury.  If the defense goes to the jury the defense must prove impossibility by a preponderance of the evidence.

To do this the court ruled that the defendant must show that he or she acted in good faith and made all reasonable efforts to pay the amount due, but was unable to do so through no fault of his or her own.  Efforts to seek employment or borrow money are needed, but the court made clear that the defendant must go beyond that and use all resources at the defendant's disposal to pay the child support.   It must have been impossible for the defendant to obtain the resources to pay. 

The court included a non-exhaustive list of factors including that the defendant: 1) "diligently sought employment", 2) attempted to secure additional employment; 3) whether investments were liquidated; 4) whether the defendant received gifts or an inheritance; 5) whether the defendant owns a home where refinancing is possible; 6) whether assets can be sold or used as loan collateral; 7) the priority the defendant placed on paying child support over the purchase of luxury or non-essential items; 8) whether reasonable precautions were taken to guard against "financial misfortune and has arranged his or her financial affairs with future contingencies in mind, in accordance with one's parental responsibility to one's child;" 9) the existence of "unexplored possibilities for generating income for payment of court-ordered support; and 10) major unexpected circumstances preventing payment.  The court explicitly stated that passivity, neglect, and failure to plan will not excuse non-payment of child support.  Hiding or being untruthful about resources or assets or the failure to seek a timely change to the child support order when circumstances indicate it is impossible to pay may also prevent the defendant from using the defense. 

Overall this is a very narrow defense that must be carefully presented at trial or the defense may never get to the jury.  Individuals in a situation where they cannot pay child support must be aware that they must exhaust every possibility or option they have to make good on their obligation if they are to avail themselves of this defense.


http://www.freep.com/article/20120802/NEWS05/308020123/Michigan-Supreme-Court-clarifies-child-support-ruling

http://courts.michigan.gov/supremecourt/Clerk/11-12-Term-Opinions/141154-141181-141513-Opinion.pdf

s/ Kurt Koehler
308 1/2 S. State Street Suite 36
Ann Arbor, Michigan 48198
(Washtenaw County)

Plain Language

Below is an amusing article about legislative attempts to make administrative agencies and Departments of the federal government write in plain language. The Plain Writing Act of 2010 attempted to mandate this, but that is not likely to happen quickly especially in the military related departments. Passive language and acronyms tend to obscure things very quickly. The legal profession isn't much better at it. 

http://usnews.msnbc.msn.com/_news/2012/07/19/12840181-government-gobbledygook-its-dying-a-slow-painful-death?lite
http://www.cantondailyledger.com/news/x1914867724/Plain-language-law-off-to-a-spotty-start
http://www.plainlanguage.gov/plLaw/index.cfm
http://centerforplainlanguage.org/resources/plain-writing-laws/plain-writing-act-of-2010/
Executive Order 13563 http://www.gpo.gov/fdsys/pkg/FR-2011-01-21/pdf/2011-1385.pdf
Executive Order 12866 http://www.plainlanguage.gov/populartopics/regulations/eo12866.pdf
Executive Order 12988 http://www.plainlanguage.gov/populartopics/regulations/eo12988.pdf

s/ Kurt Koehler
308 1/2 S. State Street Suite 36
Ann Arbor, Michigan 48198
(Washtenaw County)

Arizona Immigration laws

This has been an eventful week in law on a number of fronts. The Arizona immigration case, Arizona v. United States, limited states to doing brief immigration status checks on people arrested for some other reason. http://www.supremecourt.gov/opinions/11pdf/11-182.pdf. Last year the Supreme Court upheld an Arizona law in Chamber of Commerce of the United States v. Whiting that sanctioned employers for intentionally or knowingly employing illegal aliens by suspending or revoking their licenses. http://www.supremecourt.gov/opinions/10pdf/09-115.pdf. The law also required employers to use e-verify. The Arizona law for employer compliance was not preempted by federal law. This is not just an American reaction to immigration nor is it new. The same protectionist sentiment could be found today in Europe and Asia. It was also quite prevalent into the 1850s in the United States. In fact it was A major force in the splintering and end of the Whig party at that time. Now China is also cracking down on illegal immigration. http://abcnews.go.com/International/t/story/china-law-targets-foreigners-working-illegally-16684735

s/ Kurt Koehler
308 1/2 S. State Street Suite 36
Ann Arbor, Michigan 48198
(Washtenaw County)

Supreme Court Admission

On June 4 I was in Washington and took the oath to join the bar of the United States Supreme Court.  I went with the annual Phi Alpha Delta Day at the Supreme Court.  There were a couple of other groups there as well for the same purpose.  We got to eat breakfast and wait for the court hearing in the Rehnquist dining room.  The court issued two opinions during the hearing with Justice Thomas giving the opinion summary for Reichele v. Howards and Justice Breyer giving the summary for the opinion in Armour v. City of Indianapolis.  After the opinions were read they had each of us stand in turn after our names were read as part of the motion for admission made by Tom Bentz, a PAD attorney in Washington.  The entire group was then administered the oath by the court clerk Gen. Sutter.  Afterwards we returned to the dining room for a while and then left for pictures outside.  We had a group lunch at B. Smith's in Union station.

http://www.pad.org/upcoming-events/pad-day-at-the-supreme-court/

s/ Kurt Koehler
308 1/2 S. State Street Suite 36
Ann Arbor, Michigan 48198
(Washtenaw County)

Memorial Day

Happy Memorial day! 36 USC Section 116: "The President is requested to issue each year a proclamation— (1) calling on the people of the United States to observe Memorial Day by praying, according to their individual religious faith, for permanent peace; (2) designating a period of time on Memorial Day during which the people may unite in prayer for a permanent peace; (3) calling on the people of the United States to unite in prayer at that time; and (4) calling on the media to join in observing Memorial Day and the period of prayer."

s/ Kurt Koehler
308 1/2 S. State Street Suite 36
Ann Arbor, Michigan 48198
(Washtenaw County)

Corporate Forms

The Economist has a thoughtful article out this week on the changing nature of corporate forms.  It postulates that the public corporation has seen better days and that other alternative forms such as State Owned Enterprises and hybrid limited liability partnerships and LLCs might be on the rise.   http://www.economist.com/node/21555552

The last decade has also been full of corporate scandal dated back to Enron, Tyco, and Worldcom 10 years ago.  I remember the surreal days when formerly giant companies like Worldcom or Lehman Brothers fell.  The end comes only after weeks of denials and attempts to sell the public on the enduring future of the company.   But, I don't think these scandals really say much about the future of the public corporation.   They are warnings about greed and remind us of the need for vigilant investors and regulation.  Yet these scandals are the extremes.  The middle does not follow in the footsteps of the extremes though it is affected by the regulation those scandals have inspired. 

However, the public corporation, for all its faults, is probably the best way to raise a large amount of capital if you can convince people to invest.  The downside is that return is demanded in the short term meaning that long-term investments are often overlooked.  State Owned Enterprises may have some strengths, but they also have all the weaknesses of the command economy practices in the bygone communist second world.  These include corruption, monopoly, lack of vision, fear of risk, etc.  The State Owned Enterprise might seem to be on the rise now mainly in China and in socialist states, however that is mainly due to extensive growth.  At a certain point that extensive growth will hit the wall after these emerging economies fully integrate their populations into the world economy.  Then they will have to try their hand at intensive growth which requires far more innovation and risk taking.  State Owned Enterprises have not proved particularly adept at this in the past. 

As to partnerships the article below about the problems with the law firm Dewey & Leboeuf illustrates the main disadvantage of large traditional partnerships.  Namely all of your investment is on the line and you can be adversely affected by the actions of your partners that you had little to with. 
http://online.wsj.com/article/SB10001424052702303879604577412452010873254.html.   

Every corporate form, whether it be a sole proprietorship, family closely-held corporation, partnership, corporation, LLC, SOE, trust, or other entity, has its pros and cons. It is important to choose the best fit for any corporation and that fit may change over time. Hybrid business forms provide more of that needed flexibility and simplicity. The rise of the LLC and its use by small and large corporations alike is a sign of the future. 

s/ Kurt Koehler
308 1/2 S. State Street Suite 36
Ann Arbor, Michigan 48198
(Washtenaw County)