Empire Title & Guarantee Co. v. United States

• Decision Date: 09 January 1939
• Docket Number: No. 146.,146.
• Citation: 101 F.2d 69
• Parties: EMPIRE TITLE & GUARANTEE CO. v. UNITED STATES.
• Court: U.S. Court of Appeals — Second Circuit

101 F.2d 69 (1939)

EMPIRE TITLE & GUARANTEE CO. v. UNITED STATES.

No. 146.

Circuit Court of Appeals, Second Circuit.

January 9, 1939.

McPike & Zimmer, of New York City (Edward G. Zimmer, of New York City, of counsel), for plaintiff.

Michael F. Walsh, U. S. Atty., of Brooklyn, N. Y. (James W. Morris, Asst. Atty. Gen., J. Louis Monarch and Arthur L. Jacobs, Sp. Assts. to Atty. Gen., and Vine H. Smith and Hyman H. Goldstein, Asst. U. S. Attys., both of Brooklyn, N. Y., of counsel), for the United States.

Before MANTON, AUGUSTUS N. HAND, and CHASE, Circuit Judges.

MANTON, Circuit Judge.

These are cross appeals by the taxpayer and government from a judgment entered granting recovery to the plaintiff for the first cause of action (1933 tax) and dismissing plaintiff's second cause of action (1934 tax). The taxpayer is a New York corporation organized under its insurance laws and subject to the regulations of the New York State Insurance Department. It filed a capital stock tax return for the taxable years ending June 30, 1933 and June 30, 1934. The taxpayer claimed exemption from the tax on the ground that it was an insurance company (other than a life or mutual life insurance) taxable under § 204 of the Revenue Acts of 1932, 47 Stat. 169, 225, and 1934, 48 Stat. 680, 733, 26 U.S.C. § 204, 26 U.S.C.A. § 204, and therefore within the exemption provided by § 215(c) (2) of the National Recovery Act, 48 Stat. 195, 207 and § 701 (c) (2) of the Revenue Act of 1934, 48 Stat. 680, 26 U.S.C.A. § 1358(c) (2). The Commissioner denied the claims of exemption and assessed $1,770.37 for 1933 and $1,798.51 for 1934 which represents the tax, interest and penalties. These sums were paid and this suit is for their recovery. Below the court concluded that the taxpayer's income for the taxable year 1933 was derived mainly from insurance sources during that year, but as to the second cause of action, it held otherwise. Both plaintiff and defendant appeal.

The taxpayer loans money on mortgages after examining the title and inspecting and appraising the property securing the mortgage. The mortgages are sold to the investing public with the taxpayer's guarantee. After it examines title it issues a title policy of insurance. It renews its guaranteed mortgages after they have matured; it renders service in recording titles, conveyancing, and servicing its guaranteed mortgages by supervising matters of insurance and taxes. During these years the taxpayer had on hand mortgages not disposed of and received 6% interest thereon, which it maintains as a reserve fund to meet the taxpayer's liability on outstanding guarantees and title insurance.

It was found below that at the end of 1932 there were outstanding guaranteed mortgages and participating certificates amounting to $10,420,324.12, while undisposed of mortgages amounted to $1,866,363.95. At the end of the year 1933 outstanding mortgage guarantees were $7,940,187.50; undisposed of were $1,813,508.50. At the end of the year 1934, the outstanding guaranteed mortgages amounted to $7,299,366.70, while undisposed of mortgages amounted to $1,131,090.73. The taxpayer received 6% from the mortgages and paid 5½% to the mortgagees or the holders of participating certificates, thus earning ½% on these mortgages to cover the premium cost of its guarantee of payment of principal and interest. It obtained the full 6% on undisposed of mortgages. Therefore the business carried on by the taxpayer resulted in sales of mortgages to the extent of from seven to ten times the volume of the mortgages it did not sell, and its gross income included in 1932 was almost three times as much income from undisposed of mortgages as from outstanding guarantees; for 1933, one and a half times as much and for 1934 a little more than one-third as much. The court below concluded that for 1933 the taxpayer was an insurance company, finding that about 69% of its total income was derived from interest on both outstanding and unsold mortgages; but that the taxpayer was not an insurance company in 1934 because only about 34% of its income came from that source while about 42% was attributable to fees for searching titles for the Home Owners Loan Corporation on which the taxpayer issued no title guarantees.

If, as the Government contends, the income on undisposed of mortgages is not incidental insurance income, but income from the business of loaning money, the judgment on the first cause of action was erroneous. The taxpayer argues that the title search fees for 1934 should be broken down into two elements: those on which no guarantee was made — about 60% — and those on which a guarantee was made, — about 40%. Hence only about 28% of the income for 1934 was on non-guaranteed search items and thus the total insurance income for the year was not 34% but 48%.

What is an insurance company within the meaning of the statute has been considered by the courts and discussed by writers.¹

Cases of life insurance and various forms of casualty and indemnity insurance contracts covering accident, fire, theft and other types of losses have presented no difficulty. There are situations involving the insurance of investments which have been troublesome. Confusion in classification of these investment insurance companies early occurred because some of the title guarantee companies were subject to regulation by the Superintendent of Insurance while others were subject to Banking Law, Consol.Laws, c. 2. A company under the insurance law, for example, was excluded from the benefits of reorganization under § 77B of the Bankruptcy Act, 11 U.S.C.A. § 207, since it was an "insurance company". In re Union Guarantee & Mortgage Co., 2 Cir., 75 F.2d...