Rev. Rul. 71-598

Advice has been requested whether the portion of original premiums set aside by a title insurance company under the provisions of New York State insurance laws may be treated as unearned premiums under the provisions of section 832(b)(4) of the Internal Revenue Code of 1954.

The taxpayer is a domestic corporation doing business as a title insurance company in the State of New York. The taxpayer has been engaged in this activity since 1938.

Section 832(b) of the Code, relating to the definition of income in the case of insurance companies subject to the tax imposed by section 831 of the Code, provides, in part, as follows:

(1) Gross income.--The term "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 * * *

* * * * *

(3) Underwriting income.--The term "underwriting income" means the premiums earned on insurance contracts during the taxable year less losses incurred and expenses incurred.

(4) Premiums earned.--The term "premiums earned on insurance contracts during the taxable year" means an amount computed as follows:

(A) From the amount of gross premiums written on insurance contracts during the taxable year, deduct return premiums and premiums paid for reinsurance.

(B) To the results 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 * * *.

The position of the Service regarding the determination of unearned premiums in the case of title insurance companies is set forth in Revenue Ruling 70-245, C.B. 1970-1, 154, which holds, in part, that the provisions of section 832(b)(4) of the Code with respect to the division of premiums received by insurance companies into earned and unearned premiums are not applicable to title insurance companies whose premiums are earned in full at the time their services are rendered.

In Nathaniel B. Early, Jr. v. Lawyers Title Insurance Corporation, 132 F. 2d 42 (1942), the court stated that the general position of the Bureau [Service] as set forth in I.T. 1981, C.B. III-1, 311 (1924) [now Revenue Ruling 70-245] was not applicable in view of the fact that a statute of the State of Virginia required title insurance companies to set aside in a reserve 10 percent of the premiums collected to be held intact for specific periods of time varying with the different types of policies and while reserved, the sums "shall at all times and for all purposes be considered and constitute unearned portions of the original premiums." The Court held that, under the provisions of the Virginia statute, the amounts reserved constituted unearned premiums taking the position that because of such statutory provisions the amounts were withdrawn from the control of the company and were held in trust for the contract holders for the specific period of time that the statute prescribed. The Court stated that ordinarily a premium paid for title insurance is to be treated as fully earned when received, citing American Title Co. v. Commissioner, 76 F. 2d 332, Ct. D. 992, C.B. XIV-2, 254 (1935).

Section 434, Article 13, Chapter 28 of the New York State Insurance Laws, as amended, provides as follows:

1. Every title insurance corporation organized and doing an insurance business under this article shall establish, segregate and maintain a reinsurance reserve during the period and for the uses and purposes hereinafter provided which shall at all times and for all purposes be deemed and shall constitute unearned portions of the original premiums and shall be charged as a reserve liability of such corporation in determining its financial condition; such reserve shall be cumulative and shall be established and shall consist of the following:

a. The reserve required to be established by such corporations up to May thirty-first, nineteen hundred forty-five pursuant to paragraph (a) of subsection one of section four hundred thirty-four of chapter twenty-eight of the consolidated laws as enacted by chapter eight hundred eighty-two of the laws of nineteen hundred thirty-nine; and

b. Beginning June first, nineteen hundred forty-five (1) one dollar fifty cents for each risk assumed under a binder or policy of insurance or any certificate or agreement issued under either of them, plus one-eightieth of one per cent of the face amount of insurance effected thereby; and (2) three percent of the gross fees and premiums received by it for guaranteed certificates of title, guaranteed searches and guaranteed abstracts of title not included in (1) of this paragraph.

c. After June first, nineteen hundred fifty-three for corporations heretofore organized, and after the expiration of one hundred eighty months from the date of beginning business for any corporation hereafter organized, that portion of the reinsurance reserve established more than one hundred eighty months prior shall be released and shall no longer constitute part of the reinsurance reserve and may be used for any corporate purpose.

The 1939 statutory provisions mentioned in section 434 1. a., are as follows:

(a) During the first ten years of its doing business after June first, nineteen hundred thirty-eight, it shall set up, accumulate and maintain a reserve at the end of each calendar month at least equal to three percent of the total gross fees and premiums received by it during the next preceding calendar month for title insurance, examinations or searches of title, and for abstracts of title written, issued or performed, as the case may be, after June first, nineteen hundred thirty-eight; and at the end of every such calendar month the amount so required to be accumulated shall be charged as a reserve liability of such corporation in determining its financial condition.

Section 434, as amended, gives to the portions of the premiums which it requires to be placed in the reserve all the attributes that pertain to unearned premiums, i.e., it withdraws them from the power of the company to use them for general purposes and impresses them with a trust in favor of the contract holders for the period of time the statute prescribes. In that respect it is similar to the provisions of the Virginia statute involved in the Nathanial B. Early, Jr. v. Lawyers Title Insurance Corporation case.

Accordingly, the taxpayer in the instant case, filing its corporation income tax returns in accordance with the provisions of sections 831 and 832 of the Code, may treat as unearned premiums, under section 832(b)(4) of the Code, the portions of original premiums established and segregated as a reinsurance reserve by the taxpayer on and after June 1, 1945, under Section 434 1. b., of the New York State Insurance Law. Similar treatment is to be given to the portions of original premiums established and segregated as a reinsurance reserve from June 1, 1938 to May 31, 1945, in accordance with the provisions of Section 434 1. a., of the New York State Insurance Laws enacted by Chapter 802 of the laws of the State of New York for 1939 (the period preceding enactment of section 434 of such laws, as amended, for 1945 by chapter 635 of the laws of the State of New York). Restoration to income from such reserve will constitute taxable income in the year of such restoration.

I.T. 3798, C.B. 1946-1, 127, and modifying Revenue Ruling 57-48, C.B. 1957-1, 212, are hereby superseded since the positions set forth therein are restated in this Revenue Ruling.