APPEAL OF LUKE & FLEMING, INC.
| Decision Date | 03 October 1924 |
| Docket Number | Docket 37. |
| Citation | 1 BTA 12 |
| Parties | Appeal of LUKE & FLEMING, INC. |
| Court | U.S. Board of Tax Appeals |
G. S. Alexander, C. P. A., for the taxpayer.
J. D. Foley, Esq. (Nelson T. Hartson, Solicitor of Internal Revenue). for the Commissioner.
Before IVINS, KORNER, and MARQUETTE.
FINDINGS OF FACT.
1. Luke & Fleming, Inc., is a Georgia corporation, with its principal place of business at Augusta, Ga. This taxpayer is a cotton factor, and its principal business is storing and selling of cotton for its customers, advancing them money upon cotton so stored with it, and charging said customers interest, insurance, storage, selling commissions, etc., for handling said cotton.
2. Under its contract of storage the taxpayer became liable to its customers as insurer of the cotton so stored. To protect itself against this liability, the taxpayer entered into contracts of insurance with certain insurance companies, under which contracts the insurance companies insured taxpayer against loss of this cotton by fire. This contract was evidenced by certain policies of insurance covering the cotton in question.
3. In addition to issuing to the taxpayer the policies of insurance above referred to, the insurance companies issued to the taxpayer so-called "Certificates of insurance." These were separate and distinct documents from the policies of insurance. These certificates of insurance were written instruments certifying to the fact that the makers thereof, the insurance companies, had insured certain designated cotton in the custody of the insured taxpayer, by and under specific policies of insurance the numbers of which were indicated in the certificates. The purpose of the issuance of these certificates of insurance was to enable the insured to retain in his possession the policies of insurance and at the same time hypothecate the certificates as security for money borrowed by the insured. This obviated the necessity of assigning the policies of insurance and was intended to serve the same purpose.
4. The taxpayer, some time prior to March 22, 1916, had borrowed money and as security for the loan had hypothecated certain bills of lading and warehouse receipts and similar evidences of taxpayer's legal title to the cotton they represented. In addition thereto the taxpayer had hypothecated certain of the certificates of insurance above mentioned representing the policies of insurance covering the cotton so pledged as security.
5. On the afternoon of March 22, 1916, the policies of insurance covering the cotton in question were surrendered by the taxpayer to the insurance companies issuing them, for cancellation. The certificates of insurance representing these policies were not surrendered for cancellation but remained in the hands of the pledgee with whom they had been hypothecated.
6. On the night of March 22, 1916, fire destroyed the taxpayer's warehouse and with it the cotton of taxpayer's customers, which had been covered by the insurance policies surrendered for cancellation on the afternoon before the fire occurred.
7. The insurance companies denied liability on the policies surrendered for cancellation on March 22, 1916, whereupon the parties with whom the insurance certificates were hypothecated instituted suit against the insurance companies to enforce liability on the certificates of insurance. After considerable litigation the issue was decided favorably to the insurance companies, on the ground that the certificates of insurance were of no effect independently of the policies of insurance and that, the latter having been...
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