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Supreme Court rules companies must be taxed on severance payments

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AP

The Supreme Court says employers must pay Social Security and Medicare taxes on severance packages given to workers who were laid off involuntarily.

The justices ruled 8-0 that retailer Quality Stores Inc. was not allowed to receive a tax refund for the payments made to 1,850 former employees let go after the company filed for bankruptcy. Justice Elena Kagan did not take part in the decision.

The decision reverses rulings by the 6th U.S. Circuit Court of Appeals and a federal district court, which found the payments were not considered taxable wages.

The high court's decision is a victory for the Obama administration. Justice Department lawyers argued that the government could face more than $1 billion in tax refund claims from other employers if the lower court decision was upheld.