Title & Trust Co. of Florida v. Comm'r of Internal Revenue, Docket No. 749–68.
| Decision Date | 28 August 1972 |
| Docket Number | Docket No. 749–68. |
| Parties | TITLE & TRUST COMPANY OF FLORIDA, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Held, petitioner, a Florida title insurance company, is entitled to deduct at the end of 1965, as unearned premiums on outstanding business within the meaning of sec. 832(b)(4), I.R.C.1954, the amount of an unearned-premium reserve required by Florida law to be returned to income by an amendment to the Florida statute enacted in 1965. Kenneth G. Anderson, for the petitioner.
Robert J. Shilliday, for the respondent.
Respondent determined deficiencies in petitioner's income taxes for the taxable years 1962, 1963, and 1964, in the amounts of $58,103.84, $8,381.01, and $8,587.10, respectively. The issue for decision is whether petitioner is entitled to deduct from its underwriting income in the year 1965 the total unearned-premium reserve accumulated on its books during the years 1959 through 1964 and carry back to the years 1962 through 1964 the net operating loss created by that deduction. In the alternative, petitioner contends that it is entitled to deduct the unearned-premium reserve set up on its books for each year in issue or to deduct in 1967 the unearned-premium reserve accumulated as of December 31, 1964, and carry back the loss created by that deduction to the years 1964 and 1965.
All of the facts have been stipulated and these facts, including the stipulated exhibits, are found accordingly. We will set forth herein only those facts necessary to an understanding of this opinion.
Petitioner, a Florida corporation since 1922, with its principal place of business when the petition in this case was filed, in Jacksonville, Fla., filed its Federal income tax returns for the years 1962 through 1965 and for the year 1967, with the district director of internal revenue, Jacksonville, Fla. Petitioner's books and records have at all times here pertinent been maintained on an accrual basis of accounting and its financial statements and Federal tax returns prepared on an accrual basis for the calendar year.
During the years 1959 through 1967, petitioner issued policies of title insurance on real property, as defined in section 624.0407, Florida Statutes.1 During the years in issue, petitioner was subject to taxation under the provisions of section 831, et seq., I.R.C.1954,2 as an insurance company other than life or mutual.
In conducting its insurance business, petitioner was required to comply with all statutes of the State of Florida relating to title insurance and with applicable rules and regulations and orders and notices of the insurance commissioner of the State of Florida.
In 1959, the legislature for the State of Florida enacted section 625.111 of the Florida Statutes which provided in part as follows:
In addition to an adequate reserve as to outstanding losses as required under § 625.041, a title insurer shall maintain a guaranty fund or unearned premium reserve of not less than an amount computed as follows:
(1) Ten per cent of the total amount of risk premiums written in the calendar year for title insurance contracts shall be assigned originally to the reserve.
(2) During each of the twenty years next following the year in which the title insurance contract was issued, the reserve applicable to the contract may be reduced by five per cent of the original amount of such reserve.
Although petitioner derived risk premiums on title insurance contracts for the years 1959 and 1960, it did not establish an unearned-premium reserve with respect to risk premiums on title insurance contracts on its books until May 1961. Under date of May 3, 1961, petitioner's board of directors adopted a resolution creating such reserve for unearned premiums. This unearned-premium reserve was established in 1961 after an audit of petitioner's books had been conducted by the office of the commissioner of insurance for the State of Florida, for the years through 1960, and that office had issued to petitioner a report on the examination stating that such a reserve was required under section 625.111 of the Florida Statutes.
After establishing a premium reserve on its books in 1961 covering the years 1959 and 1960, petitioner each year thereafter computed and established annual additions to its unearned-premium reserve. For each of the years 1959 through 1967, petitioner added to its reserve 10 percent of the total amount of the risk premiums on title insurance contracts as unearned premiums. Also, for each of the years involved after 1959, petitioner restored to its income from the unearned-premium reserve an amount computed by reducing the reserve in each year following the year each policy was issued by 5 percent of the amount of reserve set up for the policy when issued.
For the years 1961 through 1967, petitioner's net additions to the unearned-premium reserve, the amounts restored to income, the net reserve addition, and the reserve balances were as follows:
+----------------------------------------------------------+
¦ ¦10 percent of¦Restored to¦Net reserve¦ ¦
+----+-------------+-----------+-----------+---------------¦
¦Year¦premium ¦income ¦addition ¦Reserve balance¦
+----+-------------+-----------+-----------+---------------¦
¦ ¦reserve ¦ ¦ ¦ ¦
+----+-------------+-----------+-----------+---------------¦
¦ ¦ ¦ ¦ ¦ ¦
+----+-------------+-----------+-----------+---------------¦
¦1961¦$24,419.02 ¦$1,196.63 ¦$23,222.39 ¦$46,570.82 ¦
+----+-------------+-----------+-----------+---------------¦
¦1962¦47,407.03 ¦2,417.58 ¦44,989.45 ¦91,560.27 ¦
+----+-------------+-----------+-----------+---------------¦
¦1963¦48,565.16 ¦4,787.93 ¦43,777.23 ¦135,337.50 ¦
+----+-------------+-----------+-----------+---------------¦
¦1964¦52,687.32 ¦7,220.16 ¦45,467.16 ¦180,804.66 ¦
+----+-------------+-----------+-----------+---------------¦
¦1965¦53,855.91 ¦9,846.59 ¦44,009.32 ¦224,813.98 ¦
+----+-------------+-----------+-----------+---------------¦
¦1966¦53,906.01 ¦12,543.35 ¦41,398.66 ¦266,212.64 ¦
+----+-------------+-----------+-----------+---------------¦
¦1967¦59,699.36 ¦15,238.65 ¦44,424.91 ¦310,637.55 ¦
+----+-------------+-----------+-----------+---------------¦
¦ ¦ ¦ ¦ ¦ ¦
+----------------------------------------------------------+
Petitioner claimed no deduction for unearned premiums on its 1959 and 1960 Federal income tax returns. After the reserve for unearned premiums was established in 1961, petitioner filed claims for refund of its Federal income taxes for 1959 and 1960 based on deducting the reserves in 1959 and 1960 which it had set up on its books for those years in 1961. Respondent disallowed these claims, and petitioner filed suit for refund in the U.S. District Court for the Middle District of Florida. In the refund suit, petitioner claimed that it was entitled to deductions for unearned premiums for the years 1959 and 1960.
The U.S. District Court granted the motion for summary judgment of the United States and sustained the disallowance of the deductions for unearned premiums for the years 1959 and 1960. Petitioner appealed this judgment of the U.S. District Court for the Middle District of Florida to the U.S. Court of Appeals for the Fifth Circuit which sustained the judgment of the District Court in Title & Trust Co. of Florida v. United States, 360 F.2d 285 (C.A.5, 1966), affirming 243 F.Supp. 42 (M.D.Fla.1965).
For the years 1961 through 1964, petitioner claimed a deduction in its Federal income tax returns for the net addition to its unearned-premium reserve for each year, in amounts as follows:
+------------------+
¦Year ¦Amount ¦
+------+-----------¦
¦1961 ¦$23,222.39 ¦
+------+-----------¦
¦1962 ¦44,989.45 ¦
+------+-----------¦
¦1963 ¦43,777.23 ¦
+------+-----------¦
¦1964 ¦45,467.16 ¦
+------------------+
Respondent disallowed these claimed deductions.
In the year 1965, the legislature for the State of Florida amended section 625.111 of the Florida Statutes to read in part as follows:
In addition to an adequate reserve as to outstanding losses as required under section 625.041, a title insurer shall establish, segregate and maintain a guaranty fund or unearned premium reserve of not less than an amount computed as follows:
(1) Ten per cent of the total amount of risk premiums written in the calendar year for title insurance contracts shall be assigned originally to the reserve.
(2) During each of the twenty years next following the year in which the title insurance contract was issued, the reserve applicable to the contract shall be reduced by five per cent of the original amount of such reserve. Said sums herein required to be reserved for unearned premiums on contracts of title insurance shall at all times and for all purposes be considered and constitute unearned portions of the original premiums and shall be held in trust for the benefit of policyholders.
In December 1965, after the Florida legislature amended section 625.111 of the Florida Statutes, petitioner adopted a resolution with respect to its unearned-premium reserve providing:
that the officers of the corporation are hereby directed to immediately and forthwith comply with Section 625.111 of the Florida Statutes, as amended, by establishing and hereafter maintaining in the amounts specified by said statute an unearned premium reserve and sufficient assets at least equal to all amounts previously allocated to the unearned premium reserve prior to June 25, 1965, in compliance with said Section 625.111, prior to being amended and to any and all amounts due to be allocated to said reserve by reason of any risk premiums received since June 25, 1965, shall be immediately segregated from the general...
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