In Gerstenbluth v. Credit Suisse Securities (USA) LLC, Docket No. 12-4125-cv (2nd Cir. 2012), the plaintiff, Chester Gerstenbluth (“Gerstenbluth”), sued his former employer, Credit Suisse Securities (USA) LLC (“Credit Suisse”), and the Internal Revenue Service, seeking a refund of Federal Insurance Contribution Act (“FICA”) taxes withheld by the employer and collected by the IRS on a $250,000 settlement payment made by Credit Suisse to Gerstenbluth. The settlement payment was made primarily in consideration of Gerstenbluth’s agreement to withdraw his Age Discrimination in Employment Act complaint, which he filed after Credit Suisse terminated his longtime employment. The district court dismissed Gerstenbluth’s complaint against Credit Suisse and granted summary judgment to the Internal Revenue Service. Gersenbluth appeals.
In analyzing the case, the Second Circuit Court of Appeals (the “Court”) said that Gerstenbluth contends that the district court erred in concluding that the settlement payment constituted “wages” received “with respect to employment” under 26 U.S.C. § 3121, and was thus subject to FICA taxes. The Court concluded that the district court was correct, and affirmed its decisions.
Why did the Court agree that the settlement payment was wages from employment and therefore subject to FICA tax? The Court said that here, the settlement agreement between Gersenbluth and Credit Suisse contemplated that Credit Suisse would withhold “applicable” taxes from the settlement payment, and that the payment would be reduced by that amount. This contemplation creates a strong presumption that the company made the payment in lieu of lost wages and that the payment is therefore wages and taxable under FICA. The Court indicated, further, that this presumption is strengthened here, since Credit Suisse classified the settlement payment as “[w]ages, tips, other 3 comp[ensation]” on Gerstenbluth’s Form W-2. The Court found that Gersentbluth could offer no argument or evidence to rebut this presumption that the settlement payment was wages.