Petition for Writ of Certiorari — Dineen v. United States

Tikes

INDEX

Petition : PAGE

Judgments below ...........- eee sete eee eee eee eee 1

Question Presented .........-.-0+eeeee reece eeeees 2

Statute Involved ........... cece cece cence eeeees 2

NE cn ca cennnneesnescatressicaveshecasons 2

Specifications of Errors to Be Urged ........----. 6

Reasons for Granting the Writ .............+++++- 6

Brief in Support of the Petition:

Opinions Below ........+.+e+seeeeee rere eee eeees 9

Jurisdiction ..........cc cece cece ccc cccceenneees 9

Question Presented, Statutes Involved, ete. ........ 9

Argument ........ 60s eee eee e eee e eee eee eees 9

Appendix (statute involved) .......-+-++e+eeee eee 15

CITATIONS

Cases :

Bowers v. Lawyers Mortgage Co., 285 U. S. 182,

188, 52 S. Ct. 350, 76 L. Ed. 690 ......... 5, 7, 9, 10, 11, 14

Brewster v. Gage, 280 U. S. 327, 50 S. Ct. 115, 74 L.

ee MD. cp anee eheaekeehed Saws Paxtieseecass 8, 14

Helvering v. R. J. Reynolds Tobacco Co., 306 U.S.

110, 59 S. Ct. 423, 83 L. Ed. 536 .....-- eee eee 8, 14

Massachusetts Mutual Life Ins. Co. v. United States,

988 U. S. 269, 53 S. Ct. 337, 77 L. Ed. 739 ........ 8, 13

National Commercial Title & Mortgage Guaranty

Co. v. Duffy, et al., 182 F. (2d) 86 ......- 0-0-0 ee 7,11, 14

United States v. Home Title Insurance Co., 285 U. 8.

191, 195, 52 S. Ct. 319, 76 L. Ed. 695 ........-- 7, 10, 12, 14

Statutes:

Judicial Code, as amended by the Act of February

13, 1925, C. 229 (43 Stat. 938) :

EE Cth orn Ras ak eKkaebbevad vaken

Revenue Act of 1928:

PAGE

OE SE Nae aR edie da basedccecneyacss 2, 6, 12, 13, 15

Treasury Regulation 94 (1936) as amended by T. D.

4759, 1937-2 C. B. 117:

A et See eee eins aw bees

Treasury Regulations 101 (1938):

I ete ie Cec ee ocak akicdiatsnnn kes

Treasury Regulation 103 (1940) :

i eer ere tere eae Pees ere ree

Treasury Regulations 111:

i ENE fcc heccciwsb ita eeeaccercias

LATO EE ee REP ae

f

IN THE

Supreme Court of the United States

OCTOBER TERM, 1945

Jide

Ses 4.64608

Rosert E. Dineen, Superintendent of Insurance of the

State of New York, as Liquidator of Lawyers Mortgage

Company, Petitioner,

v.

Tue Unirep States or AMERICA.

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES CIRCUIT COURT OF APPEALS

FOR THE SECOND CIRCUIT, AND BRIEF IN

SUPPORT THEREOF

Petition

Samuel Markowitz, counsel, on behalf of the petitioner,

Robert E. Dineen, Superintendent of Insurance of the State

of New York, as Liquidator of Lawyers Mortgage Com-

pany, prays that a writ of certiorari issue to review the

judgment of the United States Circuit Court of A-»peals

for the Second Cireuit entered in the above entitled cause

on February 6, 1946 (R. 179), affirming the judgment of the

United States District Court for the Southern District of

New York (R. 169-170).

-~

Zs

2 RV as ES ERTY : ania mduatias

Question Presented

Whether Lawyers Mortgage Company, a corporation

organized under the insurance law of the State of New

York, engaged in the business of making real estate mort-

gage loans, selling such mortgages with its policy or cer-

tificate of mortgage guarantee and receiving premiums for

such guarantee, was an insurance company for the year

1931, subject to the tax imposed by Section 204 of the

Revenue Act of 1928, and therefore not taxable under that

Section on its income from fees and charges for services

rendered in connection with the making or extending of

mortgage loans.

Statute Involved

Section 204 of the Revenue Act of 1928, ec. 852, 45 Stat.

791—set out in the Appendix, pp. 15-17, infra.

Statement

Lawyers Mortgage Company, hereinafter referred to as

the Company, a New York insurance corporation, paid an

income tax for the year 1931 as an ordinary business cor-

poration (R. 127). Subsequently, the Company was taken

over for rehabilitation by the Superintendent of Insurance

of the State of New York, and he, as Rehabilitator of the

Company, filed a claim for refund of part of the tax paid,

on the ground that the Company was an ‘‘insurance com-

pany other than life or mutual’’, subject to tax under Sec-

tion 204 of the Revenue Act of 1928, and, therefore, not

taxable on its income from sources other than those specified

in that section (Exhibit A-5, R. 131, 142). The claim for

refund not having been allowed nor rejected by the Com-

missioner of Internal Revenue, suit for refund was there-

after brought in the United States District Court for the

Southern District of New York (R. 1). The cause was

—_—— PEDONT NTN ROA LEE HOTU De Oe

tried without a jury, upon an agreed statement of facts

(Exhibit A, R. 121-130) and upon oral testimony. The

District Court directed judgment for the defendant (R.

168).

The Company was organized under the insurance law of

the State of New York, on or about February 9, 1893 (R.

123). Its charter was twice amended, the last time in 1913,

authorizing it to do a title and mortgage guarantee busi-

ness (R. 123). Since 1913 and during the year 1931, the

Company carried on a mortgage guarantee business (R.

124).

The business of the Company in 1931 was selling and

guaranteeing whole mortgages on New York real estate and

participations in real estate mortgages (R. 29, 30), extend-

ing maturing mortgages and guarantees (R. 36, 37), and

operating and selling foreclosed real estate acquired be-

cause of the Company’s guarantees (R. 41, 42). The Com-

pany’s procedures in the conduct of the business in 1931

were as follows:

Upon receipt of an application for a first mortgage loan

on real estate, the Company would make an inspection and

appraisal of the property, and, if the application was ap-

proved by the Company’s loan committee, would have an

examination made of the title to the real estate (R. 30).

The Company would then lend the money and receive the

' bond and mortgage (R. 31).

The Company would at the same time make a charge to

the borrower, covering the cost of the inspection and ap-

praisal of the property, and in the case of building loans,

additional inspections in the course of construction (R. 31,

32). The charge was usually 1% of the principal amount

for an ordinary loan, and 3% for a building loan, and was

called, on the books of the Company, a lending fee (R. 31,

32).

The Company would then sell the mortgage at its face

amount and would insure to the purchaser the payment of

principal and interest, for an annual charge of % of 1%

of the principal amount, so that the purchaser of a mort-

4

gage bearing interest at the rate of 6% would receive an

insured rate of 514% (R. 32).

Sometimes a mortgage was too large to be assigned as

a whole mortgage. In such case, the Company would issue

guaranteed participation certificates in the mortgage, or in

a group of mortgages (R. 33).

When a whole mortgage was sold to a single purchaser,

the Company delivered to the purchaser its policy of mort-

gage guarantee, and when only a part of a mortgage was

sold, the purchaser was given its guaranteed participation

certificate (R. 33). Each policy or certificate guaranteed

the payment of the principal amount thereof and of interest

at an agreed rate, which was usually % of 1% less than

the rate specified in the bond and mortgage (Exhibits E-G,

R. 32). This interest differential of 144% retained by the

Company was called in the policy the premium for its

guarantee (Exhibit E).

Except in the case of building loans which would not be

assigned until the building had been completed, the Com-

pany sold the mortgages or the participation certificates

almost immediately after the loans were made (R. 74). The

Company never made a profit on the sale of the mortgages

or certificates; they were always sold at their face amount

(R. 32).

When a mortgage was about to mature and the property

owner desired an extension, the Company would make an-

other inspection and appraisal, and upon renewal of the

loan and of its guarantee, would charge the owner a fee to

cover the expenses of inspection and appraisal (R. 39).

This charge was never more than 1% and was called, on

the books of the Company, an extension fee (R. 41).

In the event of default by the property owner, the Com-

pany would pay the guarantee holder the amount due him

for principal and interest, would then foreclose the mort-

gage and take title to the real estate (R. 41, 42). There-

after, the Company would operate and sell such real estate,

and during the year 1931, it sustained losses of $421,771.97

on the sale of such foreclosed real estate (R. 90).

5

Ever since its incorporation in 1893, and during the year

1931, the Company was always subject to examination by

and under the supervision of the Superintendent of Insur-

ance of the State of New York, was always subject to the

provisions of the New York insurance law applicable to

title and credit guaranty corporations organized there-

under, was always subject to the regulations of the Super-

intendent of Insurance, and was always required to file and

did file with the Superintendent of Insurance, the annual

statements required by him on forms approved by him (R.

128).

The Company filed its income tax return for the calen-

dar year 1931 with the Collector of Internal Revenue for

the Third District of New York, and reported therein its

gross income as follows (R. 127, 143) :

yy . PS ETE eee ee $2,051,721.67

Interest on mortgages........ 810,151.30

Interest on bank deposits... .. 35,643.34

NG. i rncncinsnateskesine* 279,526.23

Profit on sale of U. 8. bonds. . 35,499.99

¢ Lending fees .............00- 779,302.18

Extension fees .............- 275,498.84

re erry $4,267 ,343.55

Of the above total income of $4,267,343.55, the amount of

$779,302.18 represents fees and charges for inspections,

appraisals and other services in connection with the making

of mortgage loans, and the amount of $275,498.84 represents

fees and charges for such services in connection with the

extending of mortgage loans.

In 1932, this Court decided the case of Bowers v. Lawyers

Mortgage Co., 285 U. S. 182, 52 S. Ct. 350, 76 L. Ed. 690,

wherein it held that the Company was not taxable as an

insurance company for the years 1922 and 1923 because its

income from insurance for those years was less than one-

third of its total income.

The amount of mortgages and mortgage certificates

guaranteed by the Company outstanding at the end of the

year 1922 was $149,433,293.00, and outstanding at the end

of the year 1931 was $434,870,083.00 (R. 128).

The District Court held that the Company during the

year 1931 was not an insurance company within the mean-

ing of Section 204 of the Revenue Act of 1928, and directed

judgment for the respondent (R. 168), 60 F. Supp. 37.

Upon appeal to the Circuit Court of Appeals, the judgment

was affirmed (R. 179), 153 F. (2d) 425.

Specifications of Errors to Be Urged

1) The Cireuit Court of Appeals erred in holding that

the ‘‘character’’ of the business done by the Company in

1931 is not determined by the proportionate amounts of in-

come derived from insurance.

2) The Cireuit Court of Appeals erred in holding that

the Company was not an insurance company other than life

or mutual for the year 1931.

Reasons for Granting the Writ

1) The issue involved in this case is important in the

administration of the tax laws. Although the case arises

under the provisions of the Revenue Act of 1928, which

taxed insurance companies on income from specific sources

only, the question whether mortgage guaranty companies

are taxable as insurance companies or as ordinary business

corporations is still important because under the Internal

Revenue Code insurance companies are entitled to certain

benefits in the computation of their income and excess-

profits taxes.

2) The issue involved in this case depends on the proper

interpretation of the decision of this Court in the case of

Bowers v. Lawyers Mortgage Co., 285 U. S. 182, where the

Court said, at page 188, that ‘‘the character of the business

actually done in the tax years determines whether it was

taxable as an insurance company.’’ The Court did not de-

fine the term ‘‘the character of the business’’ but indicated

how it should be determined. The decision of the Circuit

Court of Appeals appears to be in conflict with the deter-

mination of this Court. The decision is also directly at

variance with the determination of the Cireuit Court of

Appeals for the Third Circuit in the ease of National Com-

mercial Title & Mortgage Guaranty Co. v. Duffy, et al.,

132 F. (2d) 86.

bi da ails

AHA DTS er pe RE ENED

3) The petitioner believes that the Circuit Court of Ap-

peals failed to apply to the instant case the decision of this

Court in United States v. Home Title Insurance Co., 285

U. S. 191, 52 S. Ct. 319, 76 L. Ed. 695, decided with the

Bowers ease, supra, and that the decision of the Circuit

Court of Appeals is probably in conflict with that decision

of this Court. This Court found that Home Title Insurance

(‘o. was an insurance company subject to tax as such be-

cause its income from insurance and other sources incident

to insurance was the major portion of its income, while, the

Cireuit Court of Appeals in the instant case held that the

proportion of income received from insurance activity had

nothing to do with the question whether a company was sub-

ject to tax as an insurance company.

f

4) The Circuit Court of Appeals conceded that the peti-

tioner found support for his contention that the Company :

was an insurance company in 1931, in Section 29.3797-7 of

Treasury Regulations 111 but held in effect that such regu-

lation was contrary to the decision of the Bowers case, supra.

This Treasury regulation has been in effect since 1937 and

should have been given weight in determining what ‘‘char-

acter of the business actually done’’ means. Massachusetts

Mutual Life Ins. Co. v. United States, 288 U. S. 269, 53 S. Ct.

2 Png ~ LER IOLA RE

ed

a

337, 77 L. Ed. 739; Brewster v. Gage, 280 U. S. 327, 50S. Ct. |

115, 74 L. Ed. 457; Helvering v. R. J. Reynolds Tobacco Co.,

306 U. S. 110, 59 S. Ct. 423, 83 L. Ed. 536.

For these reasons, it is respectfully submitted that 7 |

petition should be granted.

Samvue. MarkowiI!tz,

Counsel for Petitioner.

April, 1946.

A Sp aA PRO REEE LT AIT AP om