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in attempting to explain away the distinction between the two types of businesses, testified: “mainly the only difference between our company and a title insurance company, as such, is we do not issue our own policies. We write the policies of our underwriter which, in this case, is Chicago Title.” It is this difference, however, that is critical, for it demonstrates the fundamental distinction between the two types of companies. As this Court has stated in Allied Fidelity Corp. v. Commissioner, supra at 1077: “the favored treatment accorded insurance companies by the Internal Revenue Code is not to be extended by analogy to others not qualifying as such.”

Alternatively, petitioner tries to prove its need for reserves by pointing out the negligence provisions in paragraph 12 and the "risks" there assumed. However, petitioner there had merely warranted that its employees would do professional work, according to the standards provided by the California Land Title Association, being held, as it were, to the prescribed standard of care for the title examination industry.

Nevertheless, petitioner argues that because its “risks” are growing as it writes more and more policies in greater dollar amounts, it will not be able to meet a “catastrophic loss” should it occur. We assume petitioner means by this that it would not have the funds to repay Chicago Title if an extraordinarily large claim were based on its negligence.

First, it is noted that errors and omission insurance for title examining companies is available, and petitioner has a policy of limited coverage at present. Second, and more importantly, even though it is not an insurance company, it may, like any other business, plan for future losses by establishing reserves. As Justice Brandeis stated in Brown v. Helvering, 291 U.S. 193, 201202 (1934): “The simple answer is that * * * (plaintiff] is not an insurance company; and that the deductions allowed for additions to the reserves of insurance companies are technical in character and are specifically provided for in the Revenue Acts.

Many reserves set up by prudent business men are not

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In its coverage thereunder, petitioner is not "reinsuring" itself as an insurance company could do. Black's Law Dictionary (4th ed. 1951), defines “reinsurance" as "a contract by which an insurer procures a third person to insure him against loss or liability [incurred] by reason of original insurance. A contract that one insurer makes with another to protect the latter from a risk already assumed." (Emphasis added.) See also Franklin Title & Trust Co. v. Commissioner, 32 B.T.A. 266, 268 (1935). Petitioner's errors and omission insurance does not seem significantly different from an attorney's or doctor's malpractice insurance.

allowable as deductions. [Emphasis added.]” Cf. Lucas v. American Code Co., 280 U.S. 445 (1930).

Finally, petitioner refers to the California Insurance Code sections regulating insurance companies (see n. 3 supra). The short answer to this is that petitioner, not bearing the economic risk of loss on the insurance contracts issued, is not required to establish reserves pursuant to these provisions. The letter from the California Department of Insurance states this with unmistakable clarity.

The only control which the State of California has exercised over the petitioner has been its regulations of petitioner's title examination activities. Chicago Title, however, is registered with the State of California as an insurance company, generally, and as petitioner's underwriter, specifically. This is the company to whom California and its citizens look for the guarantee of customers' claims. 10

Congress acknowledged the financial obligations which insurance companies undertake by legislating unique tax provisions for them. The tax treatment of the insurance industry is based on the premise that the premiums paid for insurance policies are not entirely “gross income” to an insurance company, as it will pay out substantial sums each year in meeting claims based on these policies. Accordingly, reserves for losses are indispensable to the insurer's financial stability, and to the customer's continuing faith in the insurance industry.

We find that because petitioner is not undertaking any contractual liability for the title insurance policy claims, it is not “assuming anothers risk of economic loss,” as required by Allied Fidelity Corp. v. Commissioner, 572 F.2d 1190, 1193 (7th Cir. 1978). Lacking this characteristic of contractual liability, petitioner cannot come within the meaning of "insurance company" for purposes of section 831.

Decision will be entered for the respondent. HOBART A. LERNER, M.D., P.C., PETITIONER V. COMMISSIONER

See Note, “The Title Insurance Industry and Governmental Regulation,” 53 Va. L. Rev. 1523, 1527 (1967). See also 8 J. Mertens, Law of Federal Income Taxation, sec. 44.04, p. 11 (1970).

101n 1965, Chicago Title was the nation's second largest title insurer. United States v. Chicago Title & Trust Co., 242 F. Supp. 56 (N.D. III. 1965).

OF INTERNAL REVENUE, RESPONDENT

HOBART A. LERNER AND ELINOR 0. LERNER, PETITIONERS V.

COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket Nos. 4267-76, 4268–76. Filed November 27, 1978.

Petitioner Hobart A. Lerner, an ophthalmologist, incorporated his practice into Hobart A. Lerner, M.D., P.C. He paid cash for all the issued stock of the corporation. At the same time, he created a trust for the benefit of his children which was to terminate in 10 years and 1 month, and transferred all of his medical equipment and furnishings to the trust. All of the net income of the trust was to be distributed to his children at least annually. Upon termination of the trust, the corpus and any accumulated income was to revert to Dr. Lerner. Dr. Lerner's attorney was named trustee. The trustee immediately entered into a lease with the corporation that was coextensive with the term of the trust, leasing all the medical equipment and furnishings to the corporation for a reasonable rent. Held, the rent paid by the corporation to the trust was an ordinary and necessary business expense deductible by the corporation. Held, further, the income of the trust was taxable to the beneficiaries thereof and not to the grantor, Dr. Lerner.

Sherman F. Levey, for the petitioners.
Louis J. Zeller, Jr., for the respondent.

DRENNEN, Judge: In these consolidated cases respondent determined deficiencies as follows:

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All of the issues raised by the notices of deficiency have been settled by the parties with the following exceptions:

(1) Whether rental payments made by a professional corporation to a “Clifford" trust established pursuant to sections 671– 678, I.R.C. 1954,1 for the use of equipment donated to the trust

All section references are to the Internal Revenue Code of 1954, as amended and in effect in the years in issue, unless otherwise specified.

by the corporate shareholder and for equipment acquired by the trustee are ordinary and necessary business expenses of the corporation;

(2) Whether the rental payments described above are taxable as ordinary income to the corporate shareholder instead of to the income beneficiaries of the trust.

FINDINGS OF FACT

Most of the facts have been stipulated and are so found. The stipulation of facts, together with the exhibits attached thereto, are incorporated herein by reference.

During the taxable years 1970 through 1972, Hobart A. Lerner (hereinafter referred to as Dr. Lerner) and Elinor 0. Lerner resided in Rochester, N. Y. They filed their returns for the taxable years 1970 through 1972 with the North-Atlantic Service Center, Andover, Mass.

Dr. Lerner is a licensed physician specializing in ophthalmology. From 1949 until October 1, 1970, he was self-employed as an ophthalmologist.

Hobart A. Lerner, M.D., P.C. (hereinafter referred to as the corporation), is a professional service corporation incorporated by Dr. Lerner under the laws of the State of New York on September 21, 1970. Dr. Lerner's capital contribution was $500 for which he received 100 of the 200 shares authorized to be issued by the corporation. He was the corporation's sole shareholder, director, and president during the taxable years at issue; Elinor 0. Lerner was the corporation's secretary. The corporation is a separate taxable entity for Federal income tax purposes.

The corporation filed its returns for the fiscal years ending September 30, 1971 and 1972, with the North-Atlantic Service Center, Andover, Mass.

The corporation was empowered by its certificate of incorporation to purchase or lease any real or personal property reasonably required in the conduct of its professional business.

On October 1, 1970, the corporation commenced business. Dr. Lerner, Elinor 0. Lerner, and others, including a licensed optometrist, became its employees. Dr. Lerner is the only physician employed by the corporation. All of the people who were employed by the corporation on October 1, 1970, had been previously employed by Dr. Lerner. The corporation charged fees for the services rendered by its employees and reported them as taxable income on its tax returns.

On October 1, 1970, Dr. Lerner also executed a trust agreement for the benefit of his three minor children. The trust agreement had been drafted by Samuel Atlas, one of Dr. Lerner's attorneys. Atlas, who had known Dr. Lerner socially for many years, also was the trustee. The trust agreement provided in pertinent part:

1. The Grantor has simultaneously and with the execution of this agreement delivered and transferred to the Trustee all of the items of personal property set forth in Exhibit A attached hereto, which shall constitute the trust estate, subject to such items of personal property as in the discretion of the Grantor may from time to time be added to the trust estate, which the Trustee agrees to hold in trust subject to the following terms, conditions, and purposes.

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3. The Trustee under this declaration of trust shall hold, manage, invest, and reinvest the trust property, shall mortgage, lease, sell or exchange item for item or item for like item of trust property, shall accumulate, take and hold items of property of income producing quality, unlike such items of property delivered by this agreement, and shall collect and receive the income therefrom and after deducting all necessary expenses, incident to the administration of this trust, shall distribute the entire net income to each of the beneficiaries or their designees, annually or more often in the discretion of the Trustee.

4. The trust provided herein shall terminate on November 12, 1980, or upon the earlier date of the death of the beneficiary of such trust. Upon the termination of such trust, or trusts, any accumulated and undistributed income together with the Corpus of the Trust shall be paid and distributed to Hobart A. Lerner, the Grantor, herein, or to his estate if he is not then alive.

5. In the administration of this trust or these trusts, the Trustee, shall have all of such powers as are exercised in a fiduciary capacity, and authorized under the Laws of the State of New York, and such powers shall be exercised primarily in the interest of the beneficiaries as follows:

A. To hold and to continue to hold as an investment, the property received hereunder, and any additional property which may be received, so long as he deems proper, and to invest and reinvest in any securities or property, whether or not income producing, deemed by him to be for the best interest of the trust and the beneficiaries hereunder, and not withstanding that the same may constitute lease hold, royalty interest, patents, and to rent or lease any property of the trust for such time and upon such terms and for such price or prices as in his discretion and judgment may seem just and proper and for the best interest of the trust and the beneficiaries, irrespective of any other provisions or of the termination of any one of the trusts. Also, to sell and convey any of the property of the trust or any interest therein, or to exchange the same for other property, for such price or prices and upon such terms as in his discretion and judgment may be deemed for the best interest of the trust and the beneficiaries hereunder

[A]lso to make all repairs and improvements at any time deemed necessary and proper to and upon the property constituting a part of the trust, and to build, construct, and complete

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