Rev. Rul. 71-404

The purpose of this Revenue Ruling is to update and restate, under the current statute and regulations, the position set forth in G.C.M. 5355, C.B. VII-2, 160 (1928), and S.M. 5501, C.B. V-1, 102 (1926).

The question presented is whether the taxpayer, under the circumstances described below, is an insurance company, as defined in section 1.801-3(a)(1) of the Income Tax Regulations, taxable under section 831 of the Internal Revenue Code of 1954.

The taxpayer, a title guaranty corporation, was incorporated under the insurance laws of a State. The taxpayer was duly authorized by the insurance department of the State to transact the business of insuring against loss or damage on account of encumbrance upon, or defects in title to, real property, and against loss by reason of the nonpayment of principal and interest on bonds and mortgages. To carry out this function the taxpayer is required to search and examine titles to real property for which it charges a fee.

The taxpayer was also authorized by the department of insurance to employ its capital and surplus to take, buy, sell, and deal in first mortgages on real estate, and to issue bonds, debentures, and certificates against such mortgages.

The taxpayer has devoted its efforts exclusively to the title insurance business and has not dealt in first mortgages.

The taxpayer files an annual statement with the department of insurance of the State as required by its regulations.

During the current taxable year the taxpayer's income consisted of premiums on policies insuring titles to real property, fees charged for searching and examining titles incident to the issuance of title insurance policies, appraisal fees, and conveyancing fees. The taxpayer also derives income from securities deposited, as required by State law, with the insurance department of the State as security for policyholders, and from rent from subleasing a part of the building occupied as its home office. The taxpayer does not search titles or prepare conveyances unless a bona fide application for a title policy has been made.

Section 831 of the Code provides, in part, that taxes computed as provided in section 11 of the Code shall be imposed for each taxable year on the taxable income of every insurance company (other than a life or mutual insurance company).

Section 1.801-3(a)(1) of the regulations provides that the term "insurance company" means a company whose primary and predominant business activity during the taxable year is the issuance of insurance contracts. Thus, though its name, charter power, and subjection to State insurance laws are significant in determining the business which a corporation is authorized and intends to carry on, it is the character of the business actually done in the taxable year which determines whether it is taxable as an insurance company under the Code. The fact that a particular corporation files an annual statement with the State insurance department, or is under the jurisdiction and control of such department, is not conclusive as to its status as an insurance company. For this purpose, the entire business conducted by the corporation must be considered and the nature of the contracts it issues must be examined with regard to the purpose or object for which they are made.

Except for the nominal income from securities deposited as required by State law, and rent for subleasing a part of its home office all of the taxpayer's income is derived principally from the issuance of title insurance policies on real property. While the fees for searching, examining titles, and preparing conveyances are not strictly insurance functions, these activities are made solely as preliminary steps to the issuance of insurance contracts. Thus, the taxpayer's primary and predominant business activity during the taxable year is the issuance of insurance contracts.

Accordingly, the taxpayer in the instant case is an insurance company as defined in section 1.801-3(a)(1) of the regulations, taxable under section 831(a) of the Code.

G.C.M. 5355, C.B. VII-2, 160 (1928), and S.M. 5501, C.B. V-I, 102 (1926), are hereby superseded since the position stated therein is restated under the current law in this Revenue Ruling.

¹ Prepared pursuant to Rev. Proc. 67-6, C.B. 1967-1, 576.