Modern Home Fire & Cas. Ins. Co. v. Comm'r of Internal Revenue
| Citation | 54 T.C. 839 |
| Decision Date | 23 April 1970 |
| Docket Number | Docket No. 1379-68. |
| Parties | MODERN HOME FIRE AND CASUALTY INSURANCE COMPANY, PETITIONER1 v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | United States Tax Court |
OPINION TEXT STARTS HERE
Paul Johnston, for the petitioner.
Robert D. Hoffman, for the respondent.
1. Held, that petitioner was not entitled to deduct or exclude 15 percent of the premiums received on title insurance as ‘unearned premiums' within the meaning of sec. 832(b)(4), I.R.C. 1954.
2. Held, that claims paid by petitioner pursuant to policies of title insurance were properly deducted as ‘losses incurred during the taxable year on insurance contracts' within the meaning of sec. 832(b)(5), I.R.C. 1954.
3. Held, that petitioner was entitled to the surtax exemption as provided in sec. 11(c), I.R.C. 1954, for the years in issue.
Respondent determined deficiencies in petitioner's income tax as follows:
+--------------------+
¦Year ¦Deficiency ¦
+------+-------------¦
¦ ¦ ¦
+------+-------------¦
¦1962 ¦$45,125.37 ¦
+------+-------------¦
¦1963 ¦29,831.76 ¦
+------+-------------¦
¦1964 ¦48,450.66 ¦
+------+-------------¦
¦ ¦ ¦
+------+-------------¦
¦Total ¦123,407.79 ¦
+--------------------+
Concessions have been made by both parties so that the remaining issues for decision are:
(1) Is the petitioner entitled to deduct or to exclude from gross income an amount equal to 15 percent of the premium received on account of the issuance of a policy of title insurance as ‘unearned premium’ within the meaning of section 832(b)(4)?2
(2) Were the amounts paid out and deducted by the petitioner as ‘claims expense’ in its income tax returns deductible as losses incurred within the meaning of section 832(b)(5)?
(3) Was the petitioner entitled to the surtax exemption under section 11(c) of the Code?
Some of the facts have been stipulated and the stipulation of facts, together with the attached exhibits, are incorporated herein by this reference.
Petitioner, a corporation organized under the laws of the State of Alabama, maintained its principal office in Valdosta, Ga., at the time it filed its petition. Petitioner filed corporation tax returns for the calendar years 1961 through 1964 with the district director of internal revenue, Birmingham, Ala.
Petitioner was incorporated June 27, 1960, under the laws of the State of Alabama, as Modern Home Title Insurance Co. The certificate of incorporation was filed for record in the Office of the Judge of Probate of Montgomery County, Ala. By amendment to the certificate of incorporation, dated January 10, 1963, the name of the company was changed to Modern Home Fire & Casualty Insurance Co. The certificate of incorporation was further amended to provide additional authority for the company to engage in and carry on a fire and casualty insurance business in all of its aspects and to issue policies covering all types and kinds of risks, losses, and casualties generally associated with such business.
The authorized capital stock, as set forth in the certificate of incorporation was $100,000, divided into 1,000 shares of common stock of the par value of $100 per share. Petitioner commenced business with paid-up capital of $100,000 and paid-in surplus of the same amount, derived from the sale of 1,000 shares of common stock for $200 per share. In 1963 an additional amount of $100,000 was contributed to the corporation's capital surplus.
From the date of organization until November 1965 petitioner's operations were conducted in its principal office located in Montgomery, Ala. since November 1965 the company's operations have been directed from its offices in Valdosta, Ga.
Petitioner filed standard reports and annual statements with the Insurance Department of the State of Alabama during the years 1961 through 1964. The company is, and has been, licensed each year by the State of Alabama to carry on an insurance business and has not been licensed in any other State. It has been periodically examined by the Insurance Department of the State of Alabama. Each year petitioner has paid the Alabama insurance premium tax and for Alabama shares tax purposes (Ala. Code tit. 51, sec. 25 (1958)) it has been classified by the State Department of Revenue as an insurance company.
There is no statutory authority or regulation under the insurance laws in the State of Alabama which requires a title insurance company to maintain an unearned premium reserve. Nevertheless, at about the time the petitioner was organized, discussions were had with the representatives of the Department of Insurance following which petitioner transmitted a letter dated July 27, 1960, addressed to the Honorable Edmon L. Rinehart, Superintendent of Insurance, State of Alabama, as follows:
Pursuant to our conversation of July 22, I am writing you for confirmation of our proposed plan of setting up reserves for liability under the title policies issued by the Modern Home Title Insurance Company, Montgomery, Alabama.
It is readily agreed that our operations will necessitate the maintenance of a larger reserve than that required by the Georgia Department for policies issued only after a title search. We proposed to set aside and maintain a reserve not less than 15% of the single premium. We believe that this will be adequate since our policy is a Mortgagee's Policy and the limit of liability under the policy is the amount of the unpaid balance of the mortgage. We intend to maintain the reserve until such time as the mortgage referred to in the policy is satisfied by payment of (sic) refinancing. In the event of refinancing, another policy will be issued.
Nearly all of our policies will have a five year duration. When our records indicate that the mortgage is satisfied or when we are notified by the mortgage servicing company that the mortgage is satisfied prior to the original date of termination then we can take down the amount held in reserve. In those rare cases where a foreclosure sale is necessary and the state laws require that the insurance follow ownership in the land, the (sic) we will maintain the reserve for the full twenty years.
This proposed method of determining the amount of reserve to be set aside each year is naturally in lieu of statutory requirements and will be followed if experience proves that it is sufficient. At any time the experience indicates the contributions each year is (sic) not sufficient we will adjust the percentage of gross premiums (sic) accordingly.
A letter for our files indicating that the above proposal is satisfactory with you as Superintendent of Insurance of Alabama will be sincerely appreciated.
By letter dated August 8, 1960, addressed to Mr. C. E. Crawford, Modern Home Title Insurance Company, Montgomery, Alabama, the Honorable Edmon L. Rinehart, superintendent of insurance, State of Alabama, replied as follows: ‘The arrangement as outlined in your letter of July 27, 1960 is approved by me.’
In order to comply with Alabama statutory requirements (Ala. Code tit. 28, sec. 70 (1958)), during the taxable period involved, petitioner had on deposit with the treasurer of the State of Alabama for the protection of all policyholders and creditors, U.S. Government bonds with a par value of $150,000.
With the exception of a small amount of fire and extended-coverage business written in 1963, the operations of petitioner have been confined to insuring title to real property on which are located homes constructed by Modern Homes Construction Co.
Modern Homes Construction Co. (hereinafter sometimes referred to as the construction company) was incorporated in Florida on October 1, 1956, with its principal office located in Valdosta, Ga.
During the taxable years 1961 through 1964 the construction company was engaged in selling, constructing, and financing shell homes, principally in the Southern and Southwestern States. The construction company had 48 local sales offices in 12 States. The business was conducted by it in conjunction with the following subsidiaries and affiliated corporations:
+------------------------------------------------------------------+
¦Modern Homes Supply Co. ¦Modern Homes Mortgage Co. ¦
+-----------------------------------+------------------------------¦
¦Modern Homes Finance Co. ¦Modern Home Fire and Casualty ¦
+-----------------------------------+------------------------------¦
¦Modern Homes Insurance Agency, Inc.¦Insurance Company. ¦
+-----------------------------------+------------------------------¦
¦Modern Homes Development & ¦Modern Home Life Insurance Co.¦
+-----------------------------------+------------------------------¦
¦Finance Co. ¦ ¦
+------------------------------------------------------------------+
The shell homes sold by the construction company were made of wood on concrete foundation blocks. The outside of the homes was completely finished by including roofing, doors, windows, screens, and painting. The inside was unfinished except for floors, ceiling joist, partitions, studding, and closet framing and was substantially completed without assistance from the company by the customer or by contractors employed by the customer.
The construction company estimated that the cost of finishing the shell home to the average customer was about $2,000 to $3,000 if all materials, fixtures, and equipment necessary to finish the home were purchased from outside sources and outside labor was employed. Most customers substantially reduced this cost by partially finishing their homes with their own labor.
Approximately 90 percent of the construction company's sales were of shell homes on a credit basis. The construction company received the customer's promissory installment note secured by a first mortgage. At that time shell homes did not qualify for loans guaranteed or insured by the Federal government or generally...
To continue reading
Request your trial
-
Rocco, Inc. v. Comm'r of Internal Revenue, Docket Nos. 4328-75—4330-75.
...of section 269 is not limitless. For example, incorporation in order to elect subchapter S status (Modern Home Fire & Casualty Insurance Co. v. Commissioner, 54 T.C. 839, 853 (1970); Rev. Rul. 76-363, 1976-2 C.B. 90), or to obtain the tax benefits provided for Western Hemisphere trade corpo......
-
MEDICAL DEFENSE ASSOCIATES, LTD. v. Commissioner
...tax purposes. Title and Trust Company of Florida v. Commissioner Dec. 31,518, 58 T.C. 900 (1972); Modern Home Fire & Casualty Insurance Co.v. Commissioner Dec. 30,070, 54 T.C. 839 (1970), Even assuming, without deciding, that in the narrow area of the determination of unearned premiums, the......
-
Title & Trust Co. of Florida v. Comm'r of Internal Revenue, Docket No. 749–68.
...sum of the amounts added to this unearned-premium reserve during the years 1965 and 1966. As we pointed out in Modern Home Fire & Casualty Insurance Co., 54 T.C. 839, 848 (1970), where under the governing State statutes it cannot be determined whether funds in a reserve will ever be release......
-
Nibur Bldg. Corp. v. Comm'r of Internal Revenue, Docket No. 115-68.
...their position. The ruling has a single factual variance from the case at bar. In the ruling the consolidated net operating loss [54 T.C. 839] of the affiliated group was carried back to years when the affiliated group filed a consolidated return. In the case at bar the consolidated net ope......