Memorandum Opinion
STERNHAGEN, Judge: The Commissioner determined deficiencies in income tax for 1938, 1939, 1940 and 1941, of $102.12, $336.16, $844.67 and $2,096.61 and in excess profits tax of $98.73 for 1940. He disallowed an addition each year to a title policy loss reserve, holding that it represented earned premiums, and constituted merely a solvency reserve. The proceeding was presented on the following stipulation:
1. Petitioner is a corporation organized and existing under the laws of the State of New York, with its principal office at 205 Montague Street, Brooklyn, New York. Petitioner is engaged in the business of insuring titles to real estate.
2. Petitioner keeps its books and files its tax returns on the accrual basis of accounting. For the years 1938, 1939, 1940 and 1941 petitioner filed corporation income tax returns, and for the years 1940 and 1941 petitioner filed corporation excess-profits tax returns. All of these returns were filed with the Collector of Internal Revenue for the First New York District.
3. For the taxable years involved in this proceeding, *112 petitioner reported gross underwriting income in the following amounts:
| 1938 | $ 66,246.94 |
| 1939 | 73,908.00 |
| 1940 | 91,232.36 |
| 1941 | 143,573.32 |
4. Prior to the year 1938 petitioner had set up on its books an account which it termed a title policy loss reserve. At the beginning of the year 1938 this reserve was in the amount of $800.00. At the end of the year 1938 this reserve had been increased to $1,277.17, and at the end of the years 1939, 1940 and 1941 it had been increased to the respective amounts of $3,456.27, $6,208.58, and $10,355.18.
5. The reserve described in paragraph 4 hereinabove was set up and maintained by the petitioner under the provisions of Section 434 of the New York State Insurance Law and in accordance with the requirements of the Superintendent of Insurance of the State of New York.
6. Petitioner deducted from its underwriting income for each of the taxable years involved herein the amount which it added in that year to its title policy loss reserve, as follows:
| 1938 | $ 477.17 |
| 1939 | 2,179.10 |
| 1940 | 2,752.31 |
| 1941 | 4,146.60 |
7. The respondent disallowed each of the deductions claimed by the petitioner in the amount set out in the last preceding*113 paragraph and restored the respective amounts to the petitioner's underwriting income for the respective years.
The amounts which were added to the title policy loss reserve pursuant to the New York State Insurance Law are said by petitioner to be unearned premiums, and it contends that these may properly be deducted under
The taxpayer is engaged in the business of title insurance. This however does not necessarily mean that all its income is derived*114 from insurance premiums, for corporations within that general category customarily derive income from sources and activities other than insurance; and when a substantial part, say more than half, of the income is other than insurance, a corporation may not avail itself of the privileges of the insurance provisions of the revenue act.
Section 434 of the New York State Insurance Law, under which the reserve was set up, provides that the required reserve shall be composed of a percentage not alone of the insurance premiums received but also of the fees received for examinations or searches and for abstracts of title. Such latter fees are other than premiums for title insurance, and a reserve made up of a percentage of such receipts can not be called a premium reserve or be regarded as unearned premiums within
The reserve required under New York law is quite different from that required by Virginia law and considered in
Upon the stipulated facts it is held therefore that no part of the reserve set up and maintained by the petitioner under Section 434 of the New York State Insurance Law may be deducted under
Decision will be entered for the respondent.
Footnotes
1. (5) Premiums Earned. - "Premiums earned on insurance contracts during the taxable year" means an amount computed as follows:
From the amount of gross return premiums written on insurance contracts during the taxable year, deduct return premiums and premiums paid for reinsurance. To the result so obtained add unearned premiums on outstanding business at the end of the preceding taxable year and deduct unearned premiums on outstanding business at the end of the taxable year. * * *↩
2. Compare the California law as discussed in the Early case, p. 46, and the Texas law in
Commissioner v. Dallas Title & Guaranty Co., ↩ 119 Fed. (2d) 211 .