*937 1. Premiums paid a title insurance company for policies guaranteeing land titles are earned when paid and constitute gross income.
2. A reserve set up to meet future liabilities under title insurance policies is not deductible from gross income.
3. Quaere: Whether reserves set up to meet future liabilities under title insurance policies pursuant to Act No. 362, Laws of Pennsylvania, 1929, are "reserves required by law" within the meaning of the Revenue Act of 1928.
*479 Respondent determined a deficiency of $2,214.79 in petitioner's income tax for 1929 by adding to income reported the amount of a fee (less a 10 percent reserve) paid it for assuming title insurance liabilities. Petitioner contends that this fee and other amounts which were placed in "a reserve required by law" should be deducted from gross income. Respondent prays in an amended answer that the full amount of the reserves be included in net income.
FINDINGS OF FACT.
Petitioner, a Pennsylvania corporation, was organized September 19, 1929, "for the purpose of*938 carrying on the business of insuring owners of real estate, mortgages and others interested in real estate from loss by reason of defective titles, liens and encumbrances," and to take over the title insurance business formerly conducted by the American Bank & Trust Co. of Philadelphia, which had merged on August 31, 1929, with the Central National Bank (now Central-Penn National Bank of Philadelphia). As the latter was not authorized to carry on the title insurance branch of the merged corporation's business, petitioner was organized for this purpose. It was estimated after investigation that the American Bank & Trust Co. had outstanding $36,000,000 in title insurance.
On November 26, 1929, the board of directors of the American Bank & Trust Co. authorized the assumption by petitioner of all its liabilities to policyholders as of August 23, 1929, and the substitution of petitioner's policies for its own, for a consideration of $25,000. On November 27, 1929, the board of directors of the Central National Bank authorized its officers to obtain from petitioner "for a *480 consideration or premium of not exceeding $25,000, a policy or policies of re-insurance" whereby petitioner*939 would assume the liabilities and undertakings above mentioned. On the same date, petitioner issued a "policy of insurance" whereby it agreed to assume:
(a) All the liabilities of the American Bank and Trust Company and/or of The Central National Bank of Philadelphia to each and every holder of a policy or policies of title insurance issued by said American Bank and Trust Company prior to August 23rd, 1929;
(b) The settlement or defense of any claims or suits made or brought upon said policies, or any of them, and shall indemnify and save harmless the American Bank and Trust Company and The Central National Bank of Philadelphia in respect of any and all loss, damage, costs, counsel fees or expenses in the premises;
(c) And endeavor, in all proper cases, by agreement or stipulation, to arrange so that claims and actions will be asserted directly against American Title Company as the admitted successor to the liability on said policies and solely responsible therefor;
(d) And shall wherever convenient and possible, obtain substitution of the direct policies of American Title Company in lieu of outstanding policies of American Bank and Trust Company.
The policy provided further*940 that:
Liability hereunder shall not exceed Twenty Million Dollars and any loss shall be payable upon compliance by the holders of the respective policies with the conditions thereto attached and not otherwise.
The Central National Bank paid petitioner $12,500 on August 31, 1929, and $12,500 on November 27, 1929, as a premium or fee for its assumption of the outstanding title insurance liability of the American Bank & Trust Co. With the approval of the Pennsylvania Department of Banking, the amount of this premium and $445.09, being 10 percent of the premiums written on new insurance by petitioner from September 17 to December 31, 1929, were credited on petitioner's books to an account designated "Reserve for Title Insurance."
Petitioner did not report as income in its tax return for 1929 the $25,445.09 appearing in this account. Respondent added to the income reported $22,500 representing 90 percent of the premium paid by the Central National Bank.
OPINION.
STERNHAGEN: Soon after its organization in 1929 petitioner assumed all the title insurance liabilities of the American Bank & Trust Co. by the issuance of a formal policy of insurance, for which it was paid a fee*941 of $25,000. It included the full amount of this fee, *481 together with $445.90, representing 10 percent of other premiums on policies written in 1929, in a reserve, the whole amount of which, it contends, should be excluded or deducted from its gross income.
1. In guaranteeing land titles for a consideration, petitioner was engaged in an insurance business within the meaning of the revenue acts, Home Title Ins. Co. v. United States,285 U.S. 191">285 U.S. 191; affirming 50 Fed.(2d) 107, and as this business constituted its principal activity, it is taxable as an insurance company. Bowers v. Lawyers Mortgage Co.,285 U.S. 182">285 U.S. 182. Sections 201-8 of the Act of 1928, which segregate such companies from the general scheme of taxation, provide special methods for computing the taxable net income of (1) life insurance companies, (2) insurance companies other than life or mutual, and (3) mutual insurance companies other than life. Since petitioner is neither a life nor a mutual company, its net income is to be computed in accordance with section 204, applicable to other companies. By subsection 204(b)(2) vet income is defined as gross income*942 less the deductions allowed by subsection (c); gross income comprises inter alia underwriting income, which, by sec. 204(b)(4), "* * * means the premiums earned on insurance contracts during the taxable year less losses incurred and expenses incurred."
Respondent determined and contends that the premiums paid petitioner for title insurance policies are earned when paid, and cites I.T. 1981, III-1 C.B. 311, and G.C.M. 2332VI-2 C.B. 262, to this effect as reflecting the departmental attitude. Where a policy is unlimited as to time, he argues, there can not be that segregation between an earned and unearned premium which insurance of life and risks for a time certain affords, and hence no part of the premium can be regarded as unearned. There is something to be said for this, since there is no factual basis to guide the allocation of the premium between earned and unearned. But, in our opinion, it is more important that in the very nature of title insurance such an allocation can have no place. Unlike other insurance, such as life, fire, etc., which protect the insured against future events, title insurance merely guarantees against a future disclosure of unfavorable*943 circumstances existing at the time of the deed. Theoretically (and presumably in the large majority of cases) the insurance liability once assumed continues indefinitely, and the premium is therefore earned immediately upon the assumption of the liability. Petitioner's premiums, therefore, are to be regarded as earned in 1929, and constitute a part of its underwriting income in that year.
This conclusion is not affected by the fact that the first policy was issued in the acquisition of a predecessor company's business, Hoosier Casualty Co. v. Commissioner, 32 Fed.(2d) 940; affirming 6 B.T.A. 1343">6 B.T.A. 1343; *482 certiorari denied, 280 U.S. 581">280 U.S. 581. Nor is it material that this treatment of title insurance premiums is not reflected in the underwriting exhibit of the annual statement of the National Convention of Insurance Commissioners, incorporated by reference in section 204(b)(1) of the act, for that statement was adopted as a guide and not as a limitation on the application of the statute. United States v. Home Title Ins. Co., supra; *944 Massachusetts Protective Assn., Inc.,18 B.T.A. 810">18 B.T.A. 810.
2. In claiming that the reserve is deductible from gross income, petitioner has not invoked section 204(c), specifying the deductions allowable to insurance companies of its type, and we find no provision of that section which authorizes the deduction of a reserve. The rule that only those deductions specified by statute are to be allowed, Burnet v. Thompson Oil & Gas Co.,283 U.S. 301">283 U.S. 301, has been repeatedly applied against the attempted deduction of voluntary reserves, Readers' Publ. Corp. v. United States, 40 Fed.(2d) 145; 69 Ct.Cls. 681; Spring Canyon Coal Co. v. Commissioner, 43 Fed.(2d) 78; Mt. Plymouth Corp.,25 B.T.A. 1201">25 B.T.A. 1201; O. J. Morrison Department Store Co.,23 B.T.A. 895">23 B.T.A. 895; William J. Ostheimer,1 B.T.A. 18">1 B.T.A. 18, and in the case of insurance companies the reason for its application is particularly cogent because only specified items of their gross income fall within the purview of the taxing act. *945 Western Casualty Co.,20 B.T.A. 738">20 B.T.A. 738.
Petitioner cites Act No. 362, Laws of Pennsylvania, 1929, which requires title insurance companies to accumulate a reserve until $250,000 has been reached by the setting aside of 10 percent of the premiums on policies issued, or, with the consent of the secretary, a greater amount. It argues that its reserve was thus one "required by law," and seeks to justify the inclusion of the full $25,000 of the first premium plus 10 percent of the later ones by virtue of this act, although it has not shown that the secretary consented to the greater amount. Respondent contends that even if petitioner were permitted to deduct the reserves required by law, such as are allowed life insurance companies, its reserve was not among those contemplated by statute. He argues that not every reserve so required is deductible, but only those which aid "in determining what part of the gross income ought to be treated as net income for purposes of taxation" United States v. Boston Ins. Co.,269 U.S. 197">269 U.S. 197; see also *946 McCoach v. Ins. Co. of North America,244 U.S. 585">244 U.S. 585. But since, in respect of title insurance companies, there is no provision of the statute which permits the deduction of reserves required by law, it is not necessary to determine to what extent the petitioner's reserve was voluntary and to what extent it was required, because in no event is it deductible.
*483 3. Although we have held above that the entire amount of $25,445.09 received by the petitioner as premiums in 1929 and omitted from its return should have been included in the petitioner's gross income, the respondent in determining the deficiency included only $22,500 of this amount. He now claims an increase in the deficiency because he should have treated the entire amount of $25,445.09 as gross income without deduction. In accordance with the foregoing opinion, this claim for an increase in the deficiency is well founded and must be allowed.
Reviewed by the Board.
Judgment will be entered under Rule 50.