Should vacation time be taxed if part of severance pay?

Yes, this is taxable income. Section 61 of the code says this is taxable income, unless there is an exception in the code. There is no exception for this.

All compensation is taxable unless there is an express exemption for a particular amount. That is the general rule so the way to work through it is to assume that it's taxable until we find a legal basis for saying that it's not. The references you cited to have to do with whether various forms of compensation are subject to withholding for income taxes and payroll taxes, not with whether those amounts are taxable or not taxable in the first place. The fact that you would not have been taxed for those days if you were still working is not really relevant. What matters is that you received cash compensation for services rendered, and the fact that the amount of that cash was measured by the number of unused vacation days you had built up is not relevant. Your ex-employer could have measured your severance compensation in almost any way and the amount you got would still be taxable. Your ex-employer is also not required, in the absence of agreement, to pay you for your unused vacation days.

All compensation for services rendered, including compensation for untaken vacation time, is taxable income.