Rev. Rul. 80-3

1980-1 C.B. 145, 1980-1 I.R.B. 13.

                       Internal Revenue Service
                                 Revenue Ruling

                TITLE INSURANCE COMPANY; TITLE OR ABSTRACT PLANT

                           Published: January 7, 1980

Section 832.--Insurance Company Taxable Income, 26 CFR 1.832-4: Gross income.

(Also Sections 162, 263; 1.162-1, 1.263(a)-1.)

  Title insurance company; title or abstrat plant. A domestic title insurance company may deduct recurring expenses incurred to update its title plants.

ISSUE

  Are payments made by a title insurance company to update title and abstract plants deductible by the title company under section 832(c) of the Internal Revenue Code?

FACTS

  T, a domestic corporation taxable under section 831 of the Code, was in the business of insuring title to real property in 1977. As a title insurance underwriter, T must search the title to real property before issuing a policy thereon.

  To obtain necessary information, T utilizes title or abstract plants, which are an integral part of T's operations. Title plants contain the records, proofs, abstracts, legal opinions and surveys that T has accumulated.  These materials are carefully indexed in order to facilitate a rapid and accurate search of history of title to a particular parcel of real estate.

  T incurs recurring updating expenses to microfilm, post, index and file data on a daily basis with respect to transactions affecting title to all real estate located within designated localities, whether or not there is a request for a title insurance policy.  When issuing title policies, it is common for title examiners to make use of any previously prepared title reports as a starting point and to update them to the current period.

LAW AND ANALYSIS

  Section 162(a) of the Code allows a deduction for ordinary and necessay expenses paid or incurred during the taxable year to carry on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered.

  Section 263(a)(1) of the Code provides that no deduction shall be allowed for any amount paid out for permanent improvements made to increase the value of any property.  Section 263(a)(2) provides that no deduction shall be allowed for any amount expended in restoring property or in making good the exhaustion thereof for which an allowance is or has been made.

  Section 832(c)(1) of the Code provides that all ordinary and necessary expenses incurred, as provided in section 162, shall be allowed as a deduction under section 832(c) in computing the taxable income of an insurance company subject to the tax imposed by section 831.

  Section 1.263(a)-1(b) of the Income Tax Regulations provides that the amounts referred to in section 263(a) of the Code include amounts paid or incurred to add to the value, or to substantially prolong the useful life, of property owned by the taxpayer such as plant or equipment, or to adapt property to a new or different use. Amounts paid or incurred for incidental repairs and maintenance of property are not capital expenditures.

  In Bay Counties Title Guaranty Co. v. Commissioner, 34 T.C. 29 (1960), aff'd, 288 F.2d 187 (9th Cir. 1961), a title insurance company had established a title plant, which is a complex of the records that a title insurance company owns and uses in making searches of titles and preparing abstracts of titles to all of the real estate within the area of a company's operations. In addition to its regular accumulation of records of various matters affecting title to real property, the company followed the practice of purchasing copies of preliminary, or 'starter' reports and of old title policies from real estate concerns, real estate brokers, lending institutions, and others.  The title reports and title policies did not directly relate to any current searches and examinations of title insurance policies; therefore, such documents were filed for such future use, if any, as might develop.  The company deduced the cost of these 'starter' reports on its federal income tax return.

  In holding that these expenditures were made for the purchase of business assets, rather than for maintenance of the title plant, the Tax Court of the United States said:

    It is admitted that the value of the starter reports extends beyond the year of purchase and continues until such time in some indeterminate future year as petitioner shall have the occasion to write an abstract on a title covered up to a point by a starter

report.  . . . We think it is clear have an economic life extending beyond have an economic life extending beyond the year of purchase and that they represented additions and supplements to the plant which increased its value.  It is a generally accepted rule that an amount expended for an asset having a useful life which is not consumed in the year of the expenditure is usually to be classified as a capital item.

  In Bay Counties, the expenditures were incurred for the purchase of starter reports and old policies of real estate title insurance that represented the acquisition of substantial new capital assets.  The expenditures incurred by T, however, were for updating existing records, similar to maintenance costs incurred to keep the title plants in normal working order.  The amounts expended merely permitted the title plants of continue operating at a current level.

HOLDING

  T's recurring payments to update the plants are ordinary and necessary business expenses deductible under section 832(c)(1) of the Code.

Rev. Rul. 80-3, 1980-1 C.B. 145, 1980-1 I.R.B. 13.