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“Title Insurance is an agreement whereby the insurer, for a valuable consideration, agrees to indemnify the insured in a specified amount against loss through defects of title to real estate wherein the latter has an interest, either as a purchaser or otherwise.” Frost on Guaranty Insurance Sec. 162.
This definition is probably incomprehensible to most and is emblematic of the lack of interest or understanding about title insurance. Most people and businesses who own real estate are covered under a policy of title insurance. Most are not aware of it. Title insurance is, however, critically important to all real estate transactions’ ownership and financing, whether it be residential or commercial.
Title insurance insures that one who purchases real estate is in fact receiving good title, free and clear of defects. It is analogous to a warranty on the title or deed. As a purchaser, title insurance is optional. The additional premium for owner’s coverage is negligible when compared against the amount of money being spent for the purchase of the property. It is paid at closing and is uniform with all title insurance carriers. On a purchase of $500,000.00, the Owner’s Policy is a little more than one-half of one percent. The premium is paid once and the coverage lasts for the life of ownership of the property. More money is spent annually by owners of real estate for automobile insurance, homeowner’s insurance and life insurance than will be spent at the closing table to insure their largest purchase.
Why is this insurance necessary? Simply put, it insures that the largest purchase most people will make in their lifetime is defect free. It insures that ownership to the property will not be questioned; it insures that there are no easements or interests of others which will restrict your use and enjoyment of the property; and it insures that when you sell your property you will not be surprised by title defects which will make your property unmarketable and interfere with the sale. It also protects you against the expense of future litigation. The title insurance company will pay the cost of litigation which may be necessary to defend your ownership interest and use of the property. It can save an owner tens of thousands of dollars in legal fees and costs and preserve a successful sale.
The U.S. Supreme Court finally rendered its decision in U.S. v. Quality Stores, Inc., 572 U.S. ____ (2014), on March 25, 2014, in a closely watched tax case. The Supreme Court reversed the Sixth Circuit Court of Appeals, and found that severance pay is to be considered wages, and therefore subject to Federal Insurance Contribution Act (“FICA”) taxes.
This holding dashed the expectations created by the Sixth Circuit’s holding that severance pay was not subject to FICA taxes. Many businesses had already filed refund claims based on the Sixth Circuit decision, and many more were in the process. Those refund claims are now most likely going to be denied.
The taxpayer, Quality Stores, Inc., paid severance to hundreds of employees while undergoing Chapter 11 bankruptcy reorganization. In its originally filed payroll tax returns, the taxpayer paid roughly $1 million of FICA tax on those severance payments. It later sought a refund of those payments while in bankruptcy, which then placed jurisdiction with the U.S Bankruptcy Court, rather than the U.S. Tax Court. That jurisdictional position seemed to work in the taxpayer’s favor, as the Bankruptcy Court found in favor of the taxpayer, as did the Michigan District Court on review of the decision.
The Sixth Circuit then took up the case on appeal, and addressed the question of interpreting the definition of “wages” at Section 3121 of the Internal Revenue Code (IRC), which broadly defines wages as “all remuneration for employment,” with many specific exceptions that do not include severance pay.
The Sixth Circuit based its analysis primarily on the interpretation of IRC Section 3402(o), the heading of which reads “Certain Payment Other Than Wages,” and the body of which includes the following:
“For purposes of this chapter (and so much of subtitle F as relates to this chapter) – any supplemental employment benefit paid to an individual … shall be treated as if it were a payment of wages by an employer to an employee…”.
IRC Section 3402(o), however, addresses federal income tax withholding, and not FICA wages.
Notwithstanding that IRC Section 3402(o) is not a FICA provision, the Sixth Circuit took the position that the use of “as if” created the necessary implication that severance pay was not to be considered wages within the meaning of IRC Section 3121. In support of this interpretation, the Sixth Circuit cited the Supreme Court’s decision in Rowan Companies, Inc. v. U.S., 452 U.S. 247 (1981), which found that Congress intended the meaning of wages to be the same for FICA and federal income tax withholding purposes.
Based on these interpretations, the Sixth Circuit held in Quality Stores that severance pay is not subject to FICA taxes. This went against the holding in CSX Corp. v. United States, 518 F.3d 1328 (Fed. Cir. 2008), where the Federal Circuit held that severance pay should be considered wages under IRC Sec. 3121. The Sixth Circuit’s decision created a split, which immediately ushered in a large number of refund claims by business taxpayers, and not surprisingly, the Supreme Court granted certiorari to hear the decision.
The Supreme Court rejected the Sixth Circuit’s analysis, and found that neither the heading to IRC Sec. 3402(o) nor the “as if” language should change the broad reading of the term “wages” under IRC Sec. 3121. The Supreme Court noted that IRC Section 3121 had specific exclusions from wages for selected termination-related payments, implying that if Congress intended to exclude severance payments from wages it would have specifically addressed severance (just as it did the other termination-related payments).
The Supreme Court also looked at the legislative history behind IRC Sec. 3402(o), and found that the language was included to address a specific scenario – severance benefits that were tied to the receipt of state unemployment benefits. These so-called supplemental unemployment benefits needed to be considered as non-wages in order for laid-off workers to qualify for state unemployment benefits (even though they would be taxable). But varying constituents were concerned that a failure to withhold would cause problems for the laid-off workers, and Congress enacted IRC Sec. 3402(o) to provide the solution.
With this background, the Supreme Court found that IRC Sec. 3402(o) was designed to address a specific circumstance related to withholding, and was not at all designed to narrow the expansive definition of wages in IRC Sec. 3121. It reconciled its holding with the Court’s prior decision in Rowan by indicating that Rowan stood less for the idea that FICA wages and federal withholding must be the same, and more for the proposition that ease of administration and consistency in statutory interpretation should inform the definition of wages.
The Supreme Court’s decision in Quality Stores puts to rest any claim that severance pay is not to be considered wages for tax purposes.