15 T.C. 637">*637 1950 U.S. Tax Ct. LEXIS 45">*46 In this proceeding respondent has determined a deficiency of $ 34,432.04 in income tax and a deficiency of $ 14,331.81 in excess profits tax, both for the calendar year 1945. The deficiencies result from adjustments made to petitioner's net income, invested capital, and unused excess profits credit. The only adjustment in controversy is the addition of $ 101,108.18 to petitioner's net income. This was explained in a statement attached to the deficiency notice, as follows:

15 T.C. 637">*638 (a) It is held that the amount of $ 101,108.18 which was added to your reserve for reinsurance during the period from June 1, 1938 to May 31, 1945, and included in your unearned premiums at the end of the year 1945, does not constitute a proper deduction within the purview of the Internal Revenue Code in determining income for the year 1945. The premium income reported by you for that year has, therefore, been increased by $ 101,108.18.

By appropriate assignment of error petitioner contests this adjustment.

FINDINGS OF FACT.

The case was submitted upon a stipulation of facts and these facts are found as stipulated. They may be summarized as follows:

Petitioner, a New York corporation, is engaged in1950 U.S. Tax Ct. LEXIS 45">*47 the title insurance business and its principal office is in Brooklyn, New York. It keeps its books and files its tax returns on the accrual basis of accounting and on the basis of the calendar year. Petitioner's income and excess profits tax returns for the calendar year 1945 were filed with the collector of internal revenue for the first district of New York.

Petitioner's business consists primarily of examining and insuring titles to real estate. It also issues guaranteed searches of title, but does not issue abstracts of title. Petitioner makes mortgage loans and services mortgages for which it charges a fee, but does not guarantee any mortgages. It sells the mortgages and mortgage notes received for its loans. The petitioner receives some interest on these mortgage loans and on its investments in Government bonds and some rent from real property. It also receives fees for conveyances, surveys, recording of instruments, and transferring mortgage certificates and miscellaneous income. Petitioner is subject to taxation as an insurance company, other than a life or mutual insurance company, under section 204 of the Internal Revenue Code. Petitioner received from title insurance1950 U.S. Tax Ct. LEXIS 45">*48 fees and guaranteed search fees for the period from June 1, 1938, through 1945, the following amounts:

During the period from June 1, 1938, to May 31, 1945, inclusive, the petitioner set up, accumulated and maintained a premium reserve pursuant to section 434 of the Insurance Law of the State of New York, 15 T.C. 637">*639 to which it was subject, which reserve amounted to $ 91,826.11 on December 31, 1944, and which had been increased to $ 101,108.18 by May 31, 1945. No additions to this reserve were deducted by the petitioner in its income tax returns for any of the years prior to the taxable year 1945.

On June 1, 1945, the petitioner established, segregated and maintained a reinsurance reserve pursuant to the provisions of section1950 U.S. Tax Ct. LEXIS 45">*49 434 of the Insurance Law of the State of New York, as amended by chapter 635 of the New York Laws of 1945, to which the petitioner was subject, which reserve consisted of the reserve of $ 101,108.18 established by the petitioner up to May 31, 1945, and during the period from June 1, 1945, to December 31, 1945, the petitioner added to such reserve for reinsurance the sum of $ 19,878.65.

In its income tax return for the year 1945, petitioner deducted from its underwriting income the sum of $ 120,986.83, representing the provision made by it for reinsurance reserve, as follows:

Of the deduction thus claimed by the petitioner for unearned premiums in the sum of $ 120,986.83, the respondent allowed the sum of $ 19,878.65 and disallowed the balance of $ 101.108.18.

OPINION.

The sole issue in this proceeding is whether the respondent, in computing the premiums earned by petitioner in 1945, erred in1950 U.S. Tax Ct. LEXIS 45">*50 determining that the portion of petitioner's reinsurance reserve which prior to June 1, 1945, was carried in its premium reserve did not constitute unearned premiums on December 31, 1945, within the meaning of section 204 (b) (5) of the Internal Revenue Code. ¹

1950 U.S. Tax Ct. LEXIS 45">*51 15 T.C. 637">*640 Under section 434 of the New York Insurance Law (prior to its amendment by chapter 635 of the Law of 1945) which is printed in part in the margin, ² petitioner was required to and did establish a premium reserve. This reserve was a "solvency reserve" and did not constitute unearned premiums under section 204 (b) (5) because it was not known whether those funds would ever be released and become "free assets." City Title Insurance Co. v. Commissioner, 152 Fed. (2d) 859. In conformity with this holding petitioner has never claimed a deduction for the amounts added to its reserve under this statute and, therefore, the full amount of the premiums was included in gross income.

1950 U.S. Tax Ct. LEXIS 45">*52 In 1945, section 343 of the New York Insurance Law was amended by chapter 635 of the Laws of New York. The pertinent provisions of section 434, as amended, are printed in the margin. ³

1950 U.S. Tax Ct. LEXIS 45">*53 15 T.C. 637">*641 In determining its premiums earned for 1945, petitioner deducted from gross premiums the full amount of its reinsurance reserve of December 31, 1945, which it had established in accordance with section 434 of the New York Insurance Law, as amended. ⁴ Petitioner contends that this amount constituted unearned premiums within the meaning of section 204 (b) (5) of the Internal Revenue Code. Respondent disallowed the portion of the reserve which comes under section 434 (1) (a) of the New York Insurance Law as amended in 1945.

Respondent does not argue that any part of the reserve should be treated as unearned premiums on outstanding business at the end of the preceding year, as no part of the reserve at that time constituted unearned premiums. City Title Insurance Co. v. Commissioner, supra;Early v. Lawyers Title Insurance Corp., 132 Fed. (2d) 42.1950 U.S. Tax Ct. LEXIS 45">*54 Respondent's sole argument herein (relying on I. T. 3798, 1946-1 C. B. 127) is that only that portion of the reserve under section 434 (1) (b) of the New York Insurance Law, as amended, constitutes unearned premiums, and that the portion of the reserve under section 434 (1) (a) represents a mere solvency reserve which is not unearned premiums within the meaning of section 204 (b) (5) of the Internal Revenue Code.

It is true that the premium reserve established by petitioner prior to June 1, 1945, did not constitute unearned premiums but it was specifically made so after that date by the provisions of section 434 (1) (a) of the New York Amended Act. The Court of Appeals for the Second Circuit in considering the original New York statute said this of the 1945 amendment: "This amendment obviously is far more than 'declaratory.' It represents a marked change, is strikingly different from the statutory provision now before us."

We are convinced that the amended statute confers upon the entire reinsurance reserve existing on December 31, 1945, a status of unearned premiums under section 204 (b) (5), I. R. C., and no part of this reserve had such status at the1950 U.S. Tax Ct. LEXIS 45">*55 end of the preceding year. Early v. Lawyers Title Insurance Corp., supra.The amended statute required 15 T.C. 637">*642 a funded, segregated reserve and after a prescribed period of 180 months it will be released for general corporate purposes at which time it will be taxed as income. Early v. Lawyers Title Insurance Corp., supra;Title & Trust Co., 15 T.C. 510. Cf. City Title Insurance Co. v. Commissioner, supra.

Title & Trust Co., supra, we think is controlling here. In that case the taxpayer, Title & Trust Company, complying with the directive of the Oregon Insurance Commissioner issued pursuant to Oregon statutes, segregated from its 1945 premium income an amount equal to 3 per cent of its total premiums received on title insurance policies issued during the calendar years 1942, 1943, 1944, and 1945. This amount was deemed by the directive to constitute unearned premiums and was set up on taxpayer's books as a reserve as of December 31, 1945. The directive further required taxpayer to add to the reserve monthly thereafter1950 U.S. Tax Ct. LEXIS 45">*56 an amount equal to three per cent of its premium income. At the end of 180 months from January 1, 1942, such portion of the reserve as had been maintained for more than 180 months was to be released for general corporate purposes. On these facts as enumerated above, we held, following Early v. Lawyers Title Insurance Corp., supra, that the taxpayer properly excluded as "unearned premiums" from its 1945 premium income the amount of the reserve set up as of December 31, 1945.

We can see no distinction in principle in the law and the facts which govern in the instant case from those which were present in Title & Trust Co., supra. Therefore, following that case, we decide the issue here involved in favor of petitioner.

Decision will be entered under Rule 50.