Court Opinion

ID: 4631702
Source: CourtListenerOpinion
Date Created: 2020-11-21 03:10:11.606812+00
Date Added: 2024-06-11T07:57:45.965476
License: Public Domain

TITLE GUARANTEE CO. OF RHODE ISLAND, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Title Guarantee Co. v. CommissionerDocket No. 11450.United States Board of Tax Appeals10 B.T.A. 871; 1928 BTA LEXIS 4024; February 17, 1928, Promulgated 1928 BTA LEXIS 4024">*4024  LOSSES. - The petitioner who was in the business of examining and guaranteeing real estate titles did not sustain any loss in 1921 as contended by it on account of a certain policy of title insurance issued to the Lederer Realty Corporation in 1911.  Roger T. Clapp, Esq., for the petitioner.  C. C. Holmes, Esq., for the respondent.  GREEN 10 B.T.A. 871">*872  In this proceeding the petitioner seeks a redetermination of its income and excess-porfits-tax liability for the year 1921, for which the respondent in his letter dated December 3, 1925, determined a deficiency of $178.06 and further notified the petitioner that its claim for refund of $5,033 would be rejected.  The question is whether the petitioner sustained a deductible loss, under section 234(a)(4) of the Revenue Act of 1921, of $16,565.70, or any other amount, in the year 1921, by reason of a certain policy of title insurance which it issued to the Lederer Realty Corporation in 1911.  FINDINGS OF FACT.  The petitioner is a corporation incorporated under the laws of the State of Rhode Island with its principal office at Providence.  Its business is that of examining and guaranteeing real estate titles. 1928 BTA LEXIS 4024">*4025  The examination consists of first making an abstract of title and formulating an opinion as to its insurability.  In case of a favorable opinion it then issues a policy of title insurance.  In 1904 one James Campbell died intestate owning certain real estate on Pine Street in the City of Providence.  His estate being insolvent the administrator, Edward P. Metcalf, obtained what was then thought to be legal authority from the probate court to sell the Pine Street property for $16,500 to the Lederer Realty Corporation.  The latter desiring to purchase the property made application to the petitioner for a title insurance policy.  On March 7, 1911, the Lederer Realty Corporation purchased from Metcalf, as administrator, the Pine Street property for $16,500.  On the same date the petitioner issued to the Lederer Realty Corporation one of its policies of title insurance, in which the petitioner covenanted that it would "INDEMNIFY, KEEP HARMLESS AND INSURE THE SAID LEDERER REALTY CORPORATION and its successors from all loss or damage not exceeding SIXTEEN THOUSAND FIVE HUNDRED - (16,500) - DOLLARS which the said Insured shall sustain, by reason of defects of the title of the Insured1928 BTA LEXIS 4024">*4026  * * * or by reason of liens or encumbrances affecting the same at the date hereof * * *." Shortly after the sale legal proceedings, in the form of an appeal from the order of sale of the probate court, were commenced by the heirs of Campbell attacking the sale as void on the ground that the administrator had not been properly authorized on March 6, 1912, the Supreme Court of Rhode Island made a final decision in which it held that the sale was null and void, as the title to the said Pine Street property had been at all times since his death in 10 B.T.A. 871">*873  the heirs of Campbell.  This decision is reported as . The Lederer Realty Corporation promptly gave formal notice to the petitioner of the apparent defect in its title by reason of the above decision and authorized the petitioner to conduct the defense of all litigation involving the title and other rights provided for in the title policy.  The Campbell heirs took no further action until January 1, 1918, when Bradford Campbell, a grandson of the deceased, and successor to the rights of all the heirs, forcibly dispossessed the Lederer Realty Corporation and took possession1928 BTA LEXIS 4024">*4027  of the premises in question.  In the meantime, both prior and subsequent to the Supreme Court's decision in 1912, the Lederer Realty Corporation had continuously occupied the premises, rented the same, and made, with the knowledge of the petitioner, substantial improvements thereto.  On March 15, 1918, the Lederer Realty Corporation brought a bill in equity against Henry M. Boss, Jr., Administrator, (Metcalf having died in the meantime) to compel a return of the purchase price and to establish a vendee's lien upon the land.  At about the same time the Lederer Realty Corporation made claim upon the petitioner for the payment of the face amount of the title policy.  After some negotiation it was agreed, on May 20, 1918, between the petitioner, as party of the second part, and the Lederer Realty Corporation, as party of the first part, that the second party would loan the first party $16,500, without interest, payable 30 days after demand, but the petitioner agreed that: * * * It will not, nor will any other owner, holder, or other person make demand for payment of said note until the said party of the second part shall have paid the party of the first part in full for all liability1928 BTA LEXIS 4024">*4028  arising under its title policy, or until said party of the first part shall have recovered said sum of Sixteen thousand Five Hundred (16,500) dollars from the Estate of James Campbell, or shall have been finally adjudged by a competent tribunal to be the owner of the title to said property so insured * * *.  The agreement further provided that, in the event the Lederer Realty Corporation recovered the sum of $16,500 from the Estate of James Campbell with interest, such interest was to be paid to the petitioner; that the Lederer Realty Corporation was to institute no suit "at law or in equity against said party of the second part until said party of the first part has exhausted all legal means to recover said sum" of $16,500 from the Estate of James Campbell; and that the Lederer Realty Corporation had done everything by way of notice and assistance to the petitioner that was required to be done "as a condition precedent to bringing any suit against the party of the second part under its title policy." 10 B.T.A. 871">*874  On May 20, 1918, in accordance with the terms of the above agreement, the petitioner advanced the sum of $16,500 to the Lederer Realty Corporation who in turn gave the1928 BTA LEXIS 4024">*4029  petitioner its promissory note for the same amount.  In the meantime there had been prosecuted to the Supreme Court of Rhode Island a second probate appeal with reference to Campbell's estate involving a decree charging Metcalf as administrator with the purchase price money of $16,500.  On July 9, 1920, the Supreme Court of Rhode Island handed down its decision in both suits, the probate appeal reported as , and the bill in equity above referred to as having been brought by the Lederer Realty Corporation on March 15, 1918, and reported as . The effect of the two decisions was to hold that the administrator of the Campbell estate as such was not chargeable with any part of the proceeds paid to him, for that sale was, and always had been, void; and such administrator, or his successor in possession of the proceeds of the sale, was responsible to the Lederer Realty Corporation, if at all, in his individual capacity as a constructive trustee.  Upon this ground the court finally dismissed the bill in equity brought by the Lederer Realty Corporation on March 15, 1918, the1928 BTA LEXIS 4024">*4030  court saying: The question now in issue was settled by the decision referred to and consequently a restatement in full is unnecessary; the attempted sale of the real estate by the administrator Metcalf was void; the purchase price paid by complainant to Metcalf was not a part of the estate of James Campbell and such part of said purchase price as was turned over to Mr. Boss who succeeded Mr. Metcalf as administrator was received by Mr. Boss not as administrator and as a part of the estate fund, but in his individual capacity.  This purchase price fund Mr. Boss now holds in his individual capacity, the same being subject to whatever claims in law and equity the Lederer Realty Corporation may have against the same.  In 1921, Boss filed a bill of interpleader asking that the court decide to whom should be paid the purchase price in his hands, but on June 15, 1921, the Supreme Court dismissed the bill because the questions raised therein were not properly matters for interpleader within the principles of equity jurisdiction governing that form of action.  This case is reported as 1928 BTA LEXIS 4024">*4031 . On June 16, 1921, Bradford Campbell, one of the heirs of James Campbell, as assignee of the rights of all the heirs, filed a bill in equity against the Lederer Realty Corporation and Boss as administrator of the Campbell estate asking for an accounting from the Lederer Realty Corporation of the rents received while it was in possession of the Pine Street property, and also praying that the 10 B.T.A. 871">*875  administrator be enjoined from paying over to the Lederer Realty Corporation the purchase price in his hands.  This case was heard on June 22, 1921, and the presiding justice denied the prayer for an injunction provided the Lederer Realty Corporation should give a bond to the complainant to satisfy any final decree which might be entered against it.  The Lederer Realty Corporation, however, refused to sign the bond required by the court unless it could obtain another bond signed by the petitioner in the amount of $16,500 indemnifying the Lederer Realty Corporation against all claims against it enforceable at law or in equity in favor of Bradford Campbell or the heirs or representatives of the Estate of James1928 BTA LEXIS 4024">*4032  Campbell, and whether with respect to the original transaction of purchase, the accounting for intervening rents or otherwise.  In accordance with the terms of the policy issued on March 7, 1911, the petitioner's obligation was limited to the return of the purchase price from the vendor to the Lederer Realty Corporation.  The demand of the latter for the bond previously mentioned involved the incurring of a new obligation outside of the title policy.  The petitioner, however, after considering all the possible consequences which might follow the giving of the bond or the refusal to do so, decided on August 2, 1921, to give the bond demanded of the Lederer Realty Corporation.  On that day the following agreement was entered into between the petitioner and the Lederer Realty Corporation: AGREEMENT This agreement made by and between the Title Guarantee Company of Rhode Island, a Rhode Island corporation, and the Lederer Realty Corporation, also a Rhode Island corporation, both located and doing business in the City and County of Providence, State of Rhode Island.  WITNESSETH: Upon the execution and delivery by the Title Guarantee Company, of a bond in the sum of Sixteen Thousand1928 BTA LEXIS 4024">*4033  Five Hundred ($16,500) Dollars, without collateral and without surety, to save the Lederer Realty Corporation harmless from all loss, damage, cost and expense, (including Court fees and counsel fees of counsel employed by said Title Guarantee Company, or, upon failure of said Title Guarantee Company to employ counsel, then the fees of such counsel as may be required to defend such litigation), arising or that may arise out of the present litigation, or that may hereafter arise out of any other actions at law or in equity, brought by Bradford Campbell or the heirs, creditors or representatives of the Estate of James Campbell, or the respective heirs, executors, administrators, successors or assigns of any of them, and arising out of or incident to, the purchase by the Lederer Realty Corporation of the Pine Street property from the Administrator of the Estate of James Campbell, the Lederer Realty Corporation will join in a request to Henry M. Boss, to release so much of the sum of Sixteen Thousand Five Hundred ($16,500) Dollars as he now has in his hands, and permit the same to be paid to the Title Guarantee Company.  10 B.T.A. 871">*876  The Lederer Realty Company will also execute and deliver1928 BTA LEXIS 4024">*4034  the bond provided to be given by the Lederer Realty Corporation, in the suit now pending against it for the recovery of rents and profits of the Pine Street property while it occupied said premises.  Upon receipt by the Title Guarantee Company of the sums derived from the payment by Boss, the Title Guarantee Company shall surrender the demand note of the Lederer Realty Corporation for Sixteen Thousand Five Hundred ($16,500) Dollars, and the Lederer Realty Corporation shall release the Title Guarantee Company from all liability under its title guarantee policy, or otherwise in connection with said transaction.  It is further agreed that said Title Guarantee Company shall have the right at its own absolute discretion to settle said litigation at any time.  IN WITNESS WHEREOF the parties hereto have hereunto set their hands and seals this 2 day of August, 1921.  The above agreement was then signed by two officers for each of the parties, two witnesses, and had impressed upon it the seal of each corporate party.  The bonds were accordingly given and the injunction was lifted.  Boss, however, did not return any of the purchase price money in 1921 but waited for the court's decision1928 BTA LEXIS 4024">*4035  on the accounting question which was not handed down until July 6, 1925, and which resulted in a decree in favor of Bradford Campbell in the amount of $20,802.02.  The balance of the purchase price money plus accumulations in Boss' hands after paying the amount of the decree into the registry of the court was $402.  This amount Boss then turned over to the Lederer Realty Corporation who in turn paid it to the petitioner.  The petitioner claimed as a deduction from gross income for the year 1921 on account of losses sustained the amount of $16,565.70 which consisted of the loan of $16,500 made in 1918 and incidental costs in the amount of $65.70.  The respondent disallowed the deduction claimed.  OPINION.  GREEN: The petitioner contends that under the circumstances set out in the findings of fact it sustained in 1921 an uncompensated loss in connection with its trade or business of $16,565.70, which it contends, is deductible under section 234(a)(4) of the Revenue Act of 1921.  It argues in its brief as follows: It is thus contended that by giving such bond, exposing itself in fact to full liability for the rent accountability of the Lederer Company, the Title Company then definitely1928 BTA LEXIS 4024">*4036  closed the last remaining door to recovery of its advance made in 1918, since any of the purchase price now recovered was subject to cross claim of the Lederer Company against the Title Company on the bond so given by it.  This would have been so even had Mr. Boss then - as was hoped - repaid the purchase price to the Lederer Company; it is all the more so by reason of the fact that Mr. Boss thereupon decided not to make such payment.  10 B.T.A. 871">*877  It is our opinion that the petitioner sustained no deductible loss in 1921 on account of the Lederer transaction.  At no time within that year did it actually pay out any sum of money in satisfaction of its obligation under the policy of insurance given in 1911.  The amount of its loss could not have been determined in that year since it was conditioned upon subsequent termination of litigation over the fund in the hands of Boss.  It loaned the Lederer Company $16,500 in 1918 and gave that company a bond in 1921, wherein it extended and enlarged the field of possible liability to the Lederer Company.  As we view the matter the only possible claim for a deduction, outside of the $65.70 which we will discuss later, would be in the nature1928 BTA LEXIS 4024">*4037  of a bad debt on a showing by the petitioner that the note it took in 1918 became worthless or partly so in 1921 or that it was called upon during the remainder of 1921 to make good any of the promises contained in the bond which it gave on August 2, 1921.  The latter alternative is at once eliminated because the petitioner was not called upon to make good any such promises until some time in 1925.  Regarding the possibility of a bad debt deduction the petitioner has not in the first place specifically pleaded or otherwise contended that it was entitled to any deduction other than what might be allowable under section 234(a)(4) of the Revenue Act of 1921.  But even if we were to hold that the assignment of error in the petition was sufficiently general in its terms to include an issue as to a deduction coming under section 234(r)(5) of the 1921 Act, we do not think the evidence shows that the note became worthless in 1921.  The parties did not know in 1921 how the court was going to decide the matter in 1925.  The petitioner and the Lederer Company were defending the bill for an accounting on the grounds of the statute of limitations and that the latter was entitled to a counterclaim1928 BTA LEXIS 4024">*4038  for the value of the improvements put on the property beween 1911 and 1918.  Had the court decided the case on these grounds the petitioner would in all probability have sustained no loss at any time.  At any rate we do not think the circumstances were such in 1921 as would justify any determination that the note for $16,500 became worthless in whole or in part in that year.  Furthermore, the evidence does not show that any part of the note was charged off the petitioner's books of account during 1921.  In connection with the amount of $65.70 the evidence does not show the nature of such costs.  Neither does the petitioner contend for a deduction of such sum separate and apart from the entire amount of $16,565.70.  Judgment will be entered for the respondent.