Decision will be entered under Rule 50.
Complying with the directive of the Oregon Insurance Commissioner issued pursuant to Oregon statutes, petitioner segregated from its 1945 premium income an amount equal to 3 per cent of its total premiums received on title insurance policies issued during the calendar years 1942, 1943, 1944 and 1945. This amount was deemed by the directive to constitute unearned premiums and was set up on petitioner's books as a reserve as of December 31, 1945. The directive further required petitioner to add to the reserve monthly thereafter an amount equal to 3 per cent of its premium income. At the end of 180 months from January 1, 1942, such portion of the reserve as had been maintained for more than 180 months was to be released for general corporate purposes. Held, petitioner properly excluded as "unearned premiums" from its 1945 premium income the amount of the reserve set up as of December 31, 1945. Early v. Lawyers Title Insurance Corp., 132 Fed. (2d) 42, followed.
*511 Respondent has determined a deficiency in petitioner's excess profits *65 tax for the calendar year 1945 in the amount of $ 36,377.35.
The only adjustment set forth in the deficiency notice which is disputed is respondent's determination that the entire title insurance premiums reported by the petitioner were earned and that petitioner improperly deducted therefrom "unearned premiums" in the amount of $ 46,889.63.
The proceeding has been submitted upon the pleadings and a stipulation of facts. The stipulated facts are summarized below in material part.
FINDINGS OF FACT.
Petitioner is a corporation legally qualified by the State of Oregon to carry on the business of insuring titles to real estate, and has its principal place of business in Portland, Oregon. During the taxable year 1945, over 75 per cent of its gross income was derived from its title insurance business in connection with which it issued exclusively perpetual title insurance policies.
Petitioner files its returns and keeps its books on the accrual basis. Its income and excess profits tax returns for the calendar year 1945 were filed with the collector of internal revenue for the district of Oregon. Respondent mailed the deficiency notice involved in this proceeding to petitioner on November *66 2, 1948.
On December 26, 1945, petitioner received from the Insurance Commissioner of the State of Oregon the following directive:
Pursuant to Section 101-136, O. C. L. A., * an examination of your Company was made as of September 30, 1945 by a duly authorized examiner of this Department. Enclosed herewith is a copy of the examination report.
On page 23 of said report attention is called to the advisability of making adequate reserve provision for unearned premiums. Study has been given by the Department towards the formulation of a reasonable, adequate, and sound rule for the determination of such a reserve. Consideration was given to the trend of your experience, premium volume, and size and types of risks underwritten. In order to make broader comparison with the requirements and procedures followed in other states as regards such reserves, the statutes of the various states were analyzed. As a consequence, in accordance with the provisions of *512 Section 101-137, O. C. L. A. the following rule has been promulgated as applicable to your Company.
1. The Title and Trust Company shall establish, segregate and maintain an unearned premium *67 or reinsurance reserve as hereafter provided, which shall at all times and for all purposes be deemed and shall constitute unearned portions of the premiums and shall be charged as a reserve liability of your corporation in your statements; such reserve shall be cumulative and shall be established and shall consist of the following:
(a) As at December 31, 1945 or within a period of three years thereafter an amount equal to 3% of the total gross fees and premiums received or to be received on account of policies issued during the four calendar years -- 1942, 1943, 1944 and 1945; and
(b) Monthly at the close of each month beginning January, 1946, 3% of the total gross fees and premiums received or to be received on account of policies written during the preceding calendar month;
(c) After the expiration of 180 months from January 1, 1942, that portion of the unearned premium or reinsurance reserve established more than 180 months prior shall be released and shall no longer constitute part of the unearned premium or reinsurance reserve and may be used for any corporate purposes.
2. As at December 31, 1945, the Title and Trust Company may charge against and reduce thereby the "Title Loss *68 Reserve" carried in the amount of $ 50,000.00 the total of losses paid during the four calendar years 1942, 1943, 1944, and 1945 on account of title policies issued; and monthly thereafter all such losses paid during the preceding calendar month may be similarly charged against this reserve. Provided, however, that the amount of said reserve shall never be less than an amount at least equal to the aggregate estimated amount due or to become due on account of all unpaid losses and claims upon title insurance policies of which the company has received notice nor less than the aggregate of title losses incurred during the preceding 36 months. After the expiration of 180 months from January 1, 1942, the balance in this reserve account, in excess of the aforementioned estimated amounts for claims due or accrued or 36 months aggregate losses, may be released and be available for any corporate use or purpose.
3. Commencing January 1, 1946 the Title and Trust Company shall not issue a policy of title insurance for a single transaction, the face amount of which shall exceed an amount which is five times the capital and surplus of your Company; but nothing herein shall prevent the Title and *69 Trust Company from assuming the risk on a single policy jointly with another title insurance company or companies in excess of five times the Title and Trust Company's capital and surplus, provided that the total amount of such insurance shall not exceed five times the total combined capital and surplus of all such companies liable under such insurance; and provided that each such company shall not assume more than its proportionate share of the total amount at risk in accordance with the above defined maximum retention limit.
If at any date subsequent hereto, upon review or examination as provided in the Oregon Insurance Laws, it is determined that the reserves and procedures established by the rules as promulgated above are inadequate for the safety and welfare of the policyholders and not in the best interests of the company operations, said rules will be modified as necessary; furthermore should any statute hereafter be adopted by the State of Oregon bearing on this subject, then any sections of these rules inconsistent or in conflict with said statute or statutes shall be automatically voided.
*513 In compliance with the above directive, petitioner set up on its books on December *70 31, 1945, an account captioned "Unearned Premiums" with a credit to that account in the amount of $ 46,889.63 and a corresponding debit to "Undivided Profits." The figure of $ 46,889.63 was determined in accordance with the above directive of the Insurance Commissioner as follows:
| 1942 Premium $ 238,305.09 | 3% | $ 7,149.15 |
| 1943 Premium $ 330,204.13 | 3% | 9,906.12 |
| 1944 Premium $ 433,552.98 | 3% | 13,006.59 |
| 1945 Premium $ 560,926.28 | 3% | 16,827.77 |
| Total | $ 46,889.63 |
The losses paid by petitioner during each of the calendar years 1942, 1943, 1944, and 1945 on account of title insurance policies previously issued by it were charged on its books in each of the above years to the "Undivided Profits" account and were claimed as deductions on its income tax returns for those years in the following amounts:
| Year | Amount |
| 1942 | $ 2,157.52 |
| 1943 | 1,126.97 |
| 1944 | 2,267.77 |
| 1945 | 7,394.39 |
Other than as indicated by the losses paid by petitioner in the above years, there were no estimated unpaid losses or claims upon title insurance policies of which petitioner had notice during those years.
Among the items of liabilities shown on petitioner's balance sheets as at the beginning and close of the calendar year ended December 31, 1945, were the *71 following:
| Beginning | Close | |
| Reserve for Title Insurance Losses | $ 50,000.00 | $ 50,000.00 |
| Reserve for Unearned Premiums | 46,889.63 |
The above described "Reserve for Title Insurance Losses" balance sheet item was carried on petitioner's books in an account captioned "Reserve for Contingencies" and represented a surplus reserve, no part of which has been claimed as a deduction on any income tax return filed by petitioner. This "Reserve for Contingencies" account was set up on petitioner's books on July 26, 1934, by a credit to that account in the amount of $ 500 with continuing monthly credits of like amounts until December 1935, and thereafter like monthly credits of $ 1,000 until May 31, 1939, when the credit balance of the account equalled $ 50,000. In each instance the corresponding debit entry was to "Contingent Losses," the annually accumulated debit balances of this account being charged to "Surplus."
Of the securities owned by petitioner and listed among the assets shown on its balance sheet as at December 31, 1945, securities of a *514 value of $ 100,000 were, on that date, on deposit with the Treasurer of the State of Oregon as a "Guarantee Fund" as required by the insurance laws of the State *72 of Oregon.
In its income and declared value excess profits tax return for the year 1945, petitioner reported a gross income of $ 601,664.97 consisting of the following items:
| Title insurance premiums (home and branch offices) | $ 560,926.28 | |
| Less: "Unearned Premiums" | 46,889.63 | |
| $ 514,036.65 | ||
| Abstract premiums (home and branch offices) | 26,426.70 | |
| Commissions (trust, escrow and general) | 29,991.76 | |
| Interest | 13,132.36 | |
| Rents | 17,312.50 | |
| Dividends | 765.00 | |
| Total gross income reported | $ 601,664.97 |
This amount, as offset by items of $ 375 and $ 9,523.16, representing nontaxable interest and net long term capital gain, respectively, neither of which items is here in controversy, resulted in net income of $ 203,935.77 reported in petitioner's return. In the determination of the deficiency, respondent disallowed as an exclusion or deduction from petitioner's gross income the amount of $ 46,889.63 reported on the return as "Unearned Premiums" with the following explanation:
In a schedule attached to your income and declared value excess profits tax return for the year 1945 you reported title insurance premiums in the total amount of $ 560,926.28. You reported that $ 46,889.63 of such total premiums constituted "unearned premiums" *73 and credited that sum to a "reserve for unearned premiums." The sum of $ 46,889.63 was not included in net income reported.
The Bureau holds that title insurance premiums received in the total amount of $ 560,926.28 during the year 1945 were earned in that year. Net income reported has, therefore, been increased by the sum of $ 46,889.63.
OPINION.
The only question here is whether petitioner properly excluded the amount designated as "unearned premiums" from its title insurance premium income. This depends upon whether the $ 46,889.63 so excluded constituted unearned premiums within the meaning of section 204 (b) (1) (4) and ( 5) of the Internal Revenue Code. 1*74
*515 In Early v. Lawyers Title Insurance Corp., 132 Fed. (2d) 42, Judge Parker, speaking for the Fourth Circuit, declared that such portions of title insurance premiums as were *75 given for a specified period the status of unearned premiums by either law or contract should likewise be treated tax-wise as unearned premiums under section 204 (b), supra. It was subsequently held by the Second Circuit that a state statute did not impart to title insurance premiums the status of being "unearned" where it was impossible to determine whether the portions of the premiums required by the statute to be set aside as a reserve would ever be released and become "free assets" of the company. City Title Insurance Co. v. Commissioner, 152 Fed. (2d) 859.
Deductibility of the statutorily prescribed reserves out of title insurance premium income thus turns on whether the local statute calls for a mere insolvency reserve of indefinite duration or whether the required reserve is established by segregating a portion of the premium income for a specified period when the risk of loss is presumably greatest. In the latter instance, the reserve becomes taxable income to the company when it is released for general corporate purposes at the expiration of the prescribed period. Commissioner v. Dallas Title & Guaranty Co., 119 Fed. (2d) 211.
Respondent does not question the authority *76 of Early v. Lawyers Title Insurance Corp., supra, (see I. T. 3798, 1946-1 C. B. 127) but argues it is not applicable because the reserve here in question was set up under a directive of the Oregon Insurance Commissioner instead of under the direct mandate of an Oregon statute.
The Insurance Code of Oregon embodied in Title 101 of Oregon Compiled Laws Annotated (O. C. L. A.) gives the Insurance Commissioner under section 101-105, O. C. L. A., 2*78 authority to issue such department rulings, instructions and orders as he deems necessary to *516 secure the enforcement of the Insurance Code. Concerning insurance reserves, section 101-137, O. C. L. A., provides as follows:
§ 101-137. Examination: Reserve: Liability: (Formulating or adopting rules). In ascertaining the condition of an insurance company under the provisions of this act, or in any examination made by the insurance commissioner, his deputy, or examiner, he shall allow as assets only such investments, cash and accounts as are authorized by the laws of this state at the date of the examination, or under the existing laws of the state or country under which such company is organized and which investment he may approve or reject, but *77 unpaid premiums on policies written within three months shall be admitted as available resources. In ascertaining his [sic] liabilities, unless otherwise provided in this act, there shall be charged the capital stock, all outstanding claims, a sum equal to the total unearned premiums on the policies in force computed on a pro rata basis, and such an amount as may be found necessary as a reserve to provide for the future payment of deferred and undetermined claims for losses and promised benefits. In determining the amount of such reserve or unearned premium liability, the insurance commissioner, his deputy or examiner may formulate such rules as he may deem proper and consistent with law or he may adopt such rules as are used in other states or approved by the national convention of insurance commissioners.
Acting pursuant to section 101-137, O. C. L. A., supra, the Oregon Insurance Commissioner directed the petitioner "to segregate and maintain an unearned premium or reinsurance reserve as hereafter provided, which shall at all times and for all purposes be deemed and shall constitute unearned portions of the premiums * * *." The reserves were required to be 3 per cent of total premiums received on policies issued during 1942, 1943, 1944, and 1945 and 3 per cent of monthly premiums received thereafter. After 180 months, such portion of the reserve as had been established for more than 180 months would be released for general corporate purposes.
From our reading of the Oregon statutes and the directive issued to petitioner by the Oregon Insurance Commissioner, we perceive nothing to indicate that the Insurance Commissioner exceeded the bounds of his statutory authority to make rules concerning reserves. It should be apparent that *79 a valid exercise of the discretion entrusted to the Insurance Commissioner by the Oregon statutes should have equal weight and effect as the statutes themselves. Maryland Casualty Co. v. United States, 251 U.S. 342">251 U.S. 342. See also Fidelity & Deposit Co. of Marylandv.United States, (D. C., Md., May 19, 1949), affd., 177 Fed. (2d) 805, rehearing denied, 178 Fed. (2d) 753.
Respondent urges in the alternative that so much of the $ 46,889.63 as is attributable to premium income received in the years 1942, 1943, and 1944 cannot properly be excluded from petitioner's premium income in the taxable year 1945. Allowance of such an exclusion, asserts respondent, would distort petitioner's 1945 income. We cannot agree. Petitioner was required by the directive of the Insurance Commissioner to set aside in the reserve a sum equal to 3 per cent of its *517 premiums received on policies written during 1945 and the 3 preceding years. Although measured in part by premium income in the 3 years prior to 1945, the reserve was taken from 1945 income and thus made unavailable to the company for general corporate use the funds so restricted. The amount of the reserve was, therefore, properly excluded from "earned *80 premiums" in 1945 when for the first time the State of Oregon required the establishment of this reserve. A like question faced the Circuit Court in Early v. Lawyers Title Insurance Corp., supra, p. 46, where it was held that deduction of the portion of the reserve attributable to title insurance contracts issued prior to the effective date of the state statute there involved did not distort the insurance company's income in the taxable year. We are in accord with the result reached by the Circuit Court.
We conclude that respondent erred in his determination that petitioner cannot exclude from its 1945 premium income the amount required to be segregated as unearned premiums by the Oregon Insurance Commissioner pursuant to Oregon law.
Because of an uncontested adjustment,
Decision will be entered under Rule 50.
Footnotes
*. Oregon Compiled Laws Annotated. (Explanation ours.)↩
1. SEC. 204. INSURANCE COMPANIES OTHER THAN LIFE OR MUTUAL.
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(b) Definition of Income, Etc. -- In the case of an insurance company subject to the tax imposed by this section --
(1) Gross income. -- "Gross income" means the sum of (A) the combined gross amount earned during the taxable year, from investment income and from underwriting income as provided in this subsection, computed on the basis of the underwriting and investment exhibit of the annual statement approved by the National Convention of Insurance Commissioners, and (B) gain during the taxable year from the sale or other disposition of property, and (C) all other items constituting gross income under section 22; except that in the case of a mutual fire insurance company described in paragraph (1) of subsection (a) of this section, the amount of single deposit premiums paid to such company shall not be included in gross income;
* * * *
(4) Underwriting income. -- "Underwriting income" means the premiums earned on insurance contracts during the taxable year less losses incurred and expenses incurred;
(5) Premiums earned. -- "Premiums earned on insurance contracts during the taxable year" means an amount computed as follows:
From the amount of gross 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. § 101-105. General powers and duties of commissioner. (1) The insurance commissioner shall have and exercise the power to enforce all the laws of the state relating to insurance, and it shall be his duty to enforce all the provisions of such laws for the public good. He shall issue such department rulings, instructions and orders as he may deem necessary to secure the enforcement of the provisions of this act, but nothing contained in this act shall be construed to prevent any company or persons affected by any order or action of the insurance commissioner from testing the validity of same in any court of competent jurisdiction.
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